CORPORATE GOVERNANCE

preference reversal - Prioritising financial goals & accepting SEW losses

CORP GOVERNANCE SLIDE

Definition:
The expression Corporate Governance
refers to a system of structures, rights
and obligation by which corporations are
directed and controlled.
It consequently defines the tasks and
responsibilities of corporate bodies and
the rules and procedure for making
decisions and implementing company’s
purpose and strategy
In a broader way, corporate governance
involves a set of relationship between a
company’s owners (e.g. shareholders),
its management (e.g. board of directors
and managers) and other stakeholders
(such as creditors, employees, clients
etc).
Corp Gov increases value of the
company by mitigating conflict of
interest, monitoring and preventing
risks
Corporate governance systems are
regulated by a mix of hard laws (such
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as business and company laws) and of
so-called «soft laws» (such as market
and listing standards, code of self
regulations etc),

Corporate governance –the institutional

frame, governance of a firm, but inside
the definition we find some info about
some modality of governance – good
governance and sustainability.
Good governance – behavior of a firm of
members is good.

The new approach based on

sustainable governance. Yale
university ->new approach “Law and
economy”

A first theorization of firm’s ownership

structure was expressed in 1932 by
Berie and Means. In their famous “The
Modern corporation and private
property”, they introduced the
difference between ownership and
management. The owners to control the
regular rights, the managers exercise
the management activities.
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The 2nd stage for the building of modern
idea of corporate governance was the
contributions of Sumatra Ghosal in the
unpublished latest paper he introduced
the mistakes of American business
schools too based on AT. In opposition
to AT he argued that relationships within
the firms, are not always managed by
opportunism but other ethical, social
and emotional values. It brought up an
idea of business based on relationship.
Now in the literature the shareholder
view it has been replaced by
stakeholder view.
In the another perspective Gomez-Mejia
introduced the “Social emotional wealth
theory”. This view improve news topics
as the emotional variables instead of
economic profit. Recently Kotler in the
new book has introduce a new concept

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on enterprise based on “brand activism
concept”. The forms are an active rule
to develop context.

Shereholder view ECONOMICAL VALUE -

> Stekeholder view Social value

The new idea of enterprise is based on 3

significant factors:
a)Property becomes a proprietary
system: in the modern studies on CG
the ownership is an firm’s external
system. It’s a complex system. In this
way change the background of Agency:
we have a new relationship between
principal and principal, not only Principal
and Agent. In fact, the relationship is
based on In this way change the
background of Agency: we have a new
relationship between principal and
principal, not only Principal and Agent.
The relationship, in fact is based
between the majority shareholder and
the minority shareholder;
b) The study of the relationships within
the proprietary system we have to
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introduce a new perspective of the
relationship between Law and
Economics.

c) Change the idea of finance toward

sustainable finance
New perspectives are emerging that
push towards sustainable governance

The definition of Corporate

Governance is ambiguous. The our
definition is following:

(from manager perspective) Corporate

Governance is the institutional frame
(the rules the best practice to introduce
the correct behavior) where are
contemplated norms, rules and values
to support firms’ good governance.

The features of Family Firms are

different from not family business
(generation shift; the simultaneous

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presence of institutional and no
institutional governing body; the
interests conflict between founder, firm,
family).

The Family Businesses

To study family businesses we need a

specific methodological approach. A
family business is an typical firm, it
combines 3 different systems: business,
family and ownership.
Two suggested approaches:
interdisciplinary and cross approach.

In a normal firms we have owner and

manager, in family firms we have
another actor ->FAMILY – we need to
consider the culture and behavior of a
family.

Interdisciplinary approach: to study

family business we need this approach
because in FB involves different
disciplines such as management
studies, organizational studies, studies
on law and social psychology.  In
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Family Business we have 3 different
systems: business, family and
ownership.

Trasversal approach: in the Family

Business we have several aspects, e.g.
the succession and generational
change, the corporate [Link]
study the FB we have need to consider:
the law aspects; the managerial
aspects; The psychological aspects
We need to use the system and
integrated approach
In general are inconclusive many
observations(definitions,
classifications) on Family Firms
To analize family business we need
INTEGRATED and TRANSVERSAL
methodology-> 1) diff views of a firm’s
value, 2) new approach based on
sustainable governance 3) The
psychological approach 4) The
evolutionary and systemic approach

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To understand the family business, we
will analyze the theoretical background
on FB thought three areas of study:
a) The different views of firm’s
value:
1. Firms = instrument to create profit
and revenue for the owner. The
reference of this finality are some
theories, such as Agency Theory, theory
of Property Rights, finally Management
theory. In this way the focus is on the
ownership
2. Firm is a instrument for profit, but
also to generate social-economic
value. The theories -> stakeholder
theory; social emotional theory and
stewardship theory. The focus is on the
stakeholder

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b) The psychological approach:
family firms have to be studied through
entrepreneurial psychology. The founder
and his family control the business
longevity and the firm’s reputation;
->>> Generational shift and longevity
factors
c) The evolutionary and systemic
approach: the family firms is the result
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of three overlapping systems
ownership,company, family ->> he
relationship between ownership,
company, family
The Systems that affect the corporate
governance: POLITICAL AND
INSTITUTIONAL SYSTEM , FINANCIAL
SYSTEM, LEGAL SYSTEM
Corporate governance will be examined
through the factors that may influence
governance rules directly and/or
indirectly.
In particular, we will study the legal
aspects, the relationship between the
legal context and the rules of corporate
governance.
The course will provide the basic
concepts to study the differences
between the civil law approach, and
the common law; everything through
the glasses of Path dependence which
favored, in time, the consolidation of
some practices and routines.

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In the civil law system, the ownership is
“an unalienable right of every
individual”.
Ownership rights prevail over the
economic interests. In this case the
property as a community
On the other hand, in the common law
system the ownership uses material
assets in a way that can be easily
shared. In this case the property as a
commodity.

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To study the governance of family firms
is important to explain the best
practices of corporate governance to
manage the family firms.
We have to understand who's the boss
in the firm and the influence
mechanisms of governing body of the
firms.

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It is not easy to identify the boss in the
firms. So it is nor easy to identify the
relationship between institutional (board
of Director and Assembly) and not
institutional governing body (family
council; Family Assembly; Family Pact).
Anyway the governing body may be a
single person, a controlling coalition or
an obscure subject.
The study of Corporate Governance
is important to understand where
the control of governance is.
Ownership is represented mainly by the
family. Within the family an important
role is played by the founder and his
descendants.
The management is always an
expression of the trust that the family
gives to an external party. Stellantis and
LUXOTTICA are examples.
In rare cases the manager is chosen
within the family.

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In conclusion the simultaneous presence
of internal (Board of Directors,
Shareholder Meeting, Committee,
Surveillance Committee and
Management Board) external (The
Family Assembly, the Family Council,
the Family Pact) governance bodies
generate a trade-off between
institutional rules and family control.
 In this course we have to provide the
conceptual drivers to manage this trade
off: for the students, for the managers,
for the scholars
The second part will conclude with an
examination of “non-institutional” (or
internal) family governance bodies. In
particular, the “institutional” (or
external) family governing body is the
Assembly and the board of directors;
“non-institutional” family governance
bodies are:
The Family Assembly: composed of
the members of the extended family. In
the Family Assembly there are all
members of extended family owners
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and no owners. The Family Assembly
meeting, in general, preceded the
Assembly to decide the arguments.
The Family Council: composed of the
representatives of the family and
supports the Board of directors. It
defines the relationship between family
and business and family mission
towards the firm.
The Family Pact represents an
agreement among family members to
ensure stability during generational
change.
The course will also address corporate
groups that have prevailed in Italy.
The analysis of the business group will
examine the importance of generational
change and its impact on corporate
governance.
We will study three types of
generational changes in corporate
groups:

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 Generational change without a
generational break; During the
generational change the holding does
not break.
Founder transfers to the sons/children
the shares of the individual firms.
The holding holds total control over the
firms.

 Generational change with a

generational break; During the
generational change the holding breaks.
The control goes into the hands of the
individual sons/children.

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 Generational change with an
ascending generational break. During
the generational change the holding
survives but breaks the capital control

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Family board of directors consists only
from family members ->FAMILY BOARD,
the collect a board of directors which
are not the family members.
97% is family business in Italy
To analyze the family business we have
to use a new approach

We have to introduce the systems that

affect corporate governance. The 1st one
is financial system. In this moment the
financial system is a global system. The
2nd civil law system -(usa) common law
system- (Italy). 3rd – political and
institutional system.

Strategies
-The strategic decisions characterize the
firm’s basic guidelines and the
development paths for the formation
and implementation of activities.
Strategies/Tactis

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Strategies: long-term objective
strategies; Tactics: ways to achieve
goals

Corporate governance – a lot of

variables (rules, institutional framework)
Starting from pandemic or economic
crisis inside the company, the impact on
corporate system -> Corporate
Governance: No strategies, no tactics..it
is a government philosophy
It is a the institutional framework that
affect the process of the business
decisions’s implementation

The governance topic has changed

profoundly in recent times. It is no
longer oriented towards to keep the
competitive advantage, but it is
characterized by engagement behaviors
also towards the competition -

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From Porterian strategies of competitive
advantage to Blue Ocean strategies:
from economic values to innovative
value
The effectiveness of government action
is influenced by the following factors
:relations property-management,
leadership, forms of firms
 Burger King supports McDonald's and
other fast food chains. McDonald's
has promoted a communications
plan in Great Britain to support all
workers in the sector affected by the
new lockdown order.
  Theactionofengagemnttowardsthe
competitors. We help competitors
save ourselves, and our suppliers.
Brand Activism -The Brand Activism
introduce by Philip Kotler and
Christian Sarkar, in the recent book
“Brand Activism: from purpose to
action”, suggesting a review of the
social purpose as a natural evolution of
Corporate Social Responsibility (CSR)
and Environmental, Social and
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Governance (ESG). The firm have to
provide the social and economic
development of the system.
Some examples:
•Gregg Renfrew, founder and CEO of
Beautycounter said: “Our company is
proud to offer their team a day off to
attend to democracy and to go to the
polls”;
•Larry Fink, CEO of Blackrock, in a
famous letter to the CEOs: “In the past,
Black Rock was a passive investor,
maximizing short-term profit at the
expense of brands. Today the Blackrock
asks companies a strong and
transparency social purpose. In this
case the firms have to show a positive
contribution to society";
•Chatterji e Toffel, in "The New CEO
Activists" published on HBR: "The more
CEOs talk about social and political
issues, the more CEOs are expected to
do so";
•Tim Cook, Apple's CEO: “The poor
efficiency of Public Administration have
to covered by firms... “The companies
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need to take a step forward, as benefit
from well-functioning economy, with
good infrastructure and well- trained
and motivated workers."

It is possible to identify some

important stages of these changes:
  2019 THE NEW STORY OF
BUSINESS: Business Roundtable
amonge important entrepreneurs:
the firm’s purpose have to redefined
with reference to the concepts of
sustainability, versus all stakeholders
  TRIPLE BOTTOM LINE: The
strong presence of B-corp and news
concept of value creation
  FINANCIAL DESCLOSURE is not
only based on financial variaboles

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   HUMANIZING BUSINESS has
become imperative
  RESPONSIBILITY is
INTEGRATED, companies play a
fundamental role in managing
sustainability
 The issue of decisions in large
companies is studied in the works of
Berle and Means (1932) which in
examining large American business.
The authors, through empirical
research, showed that ownership
was very fractional. The largest
shareholder held less than 1%
shares: “Owners who invest in a
modern company transfer their
wealth.
  According to Berle and Means,
especially in technologically
advanced environments, the model
of the perfect managerial enterprise
is affirmed.
  The firms are managed by
management.
Starting from considerations of Berle
and Means, Markets for Corporate
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Control developed. Ownership can not
control managers-> the market controls
the manager. But there are much
consequently:
 markets are imperfects/ asymmetric
info.
 managers operate in asymmetric
situations: owners not know all
manager’s info
 managers improve your utility
functions:
improve the unrealistic info for
 managers opportunistic behaviors:
drug the market. value of shares
artificially increases, managers
pocket the bonuses but the real
value of company remains the same.
 market for Corporate Control - he
markets are imperfect; this thing
improved managers’ opportunistic
behaviour

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Corporate Governance mechanism are
adequate in large companies for
following motivations.
 The large companies are structured
 In large companies there is big
delegate problem between owners and
managers
-no single owner but proprietary system
(made up of majority shareholders and
minority shareholders.
 To create the right balance, need
rules of CG
- Corporate Governance born in
the large companies.
Porter strategies – its important for
companies to achieve competitive
advantage.
Blue Ocean idea- look for innovation,
because if the company improve
innovation.
The idea is linked with Porter, and some
idea with Blue Ocean.

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During the pandemic situation, there are
consumers – dangerous for company
Governance in relation of environmental
and (positive contribution to society) If
you want to build a new corporate
system, you need to redefine the idea
B-corp – benefit companies to produce
profit and reinvest part of the profit in
social activities.
Competitive company – produces good
profit and develop social activities.
Humanizing business- Adriano Olivetti is
the first owner that improved a new
idea-> the level of CEO must be the
regulation of employees -> to improve
responsibility.

First milestone (событие) was issue Berle

and Means
Public company is 1 shareholder, the
scholars introduced, manager- is a real
actor, the owner
MARKET FOR CORPORATE CONTROL-
Who controls the managers? Market.
(lot of problems. Owners want only a
profit; they don’t know info. Managers -
> opportunistic behavior. The real value
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of companies remains – good
agreement with provider ( contact) to
sell my products, the investors buy the
shares, but in reality its false.

Corporate governance in relation to :

In big firms- Corporate governance- idea
was born in large companies, cos they
have good structure, a lot of (majority)
shareholders, with big capital, and
minority, a lot of employees.
In medium- sized firms- they have
different characteristics. (shareholding
is similar with large companies, we
have the majority shareholders, high
concentration family) the minority
shareholders-, use of limited voting
shares, cross -shareholdings (I can
exercise control), board interlocks.
In Italy medium firms
The medium-sized enterprise is
characterized by an intermediate
dimension between the large
corporation and the small enterprise.
With reference to the organizational
aspects, the medium-sized company is
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neither a reduced version of a larger
company, nor an expanded version of a
small company, having characteristics
that differentiate it from both.
 In Italy we have 97% small businesses,
1% large, only 2% medium-sized. The
value produced by medium-sized firms
is greater than the sum of small firms
with large firms.
1. Today the shareholding of
medium-sized companies is very
similar then large companies. In this
way the Corporate Governance rules
are very important for regulate the
behaviors in shareholder meeting
and Board of directors
2. In the medium companies
prevailed a trade off between owners
and large shareholders. In Italy the
weight of institutional investors is
growing.
3. The majority shareholder uses
stock leverage to control the firm:
CG rules must control the
opportunistic behavior of the
majority shareholders.
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 4. We explain the stock leverage
mechanism in the next lessions.
5. The ownership distribution in the
Italian medium- sized company
shows a high degree of family
concentration: on average, the
largest shareholder holds 43.3% of
the total shares. The tools for
company control are:
6.  trade union agreements;
 use of limited voting shares;  cross-
shareholdings
7. board interlocks: this is the
phenomenon of groups and
interloking directorates.

In the small company – we have another

problem- we don’t have majority and
minority shareholders, another system -
the family, which interest is different,
power from the group of shareholders to
individuals, decision is made by the
founder, generational change – very
complex situation, the family pact, we
have board of directors and family
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meeting, family council -
family assembly. Rules help
The elements that qualify the small
firms:
1. small size and strong property;
2. government model strongly
centralized in the owner family;
3. transfer of power from the group
to the individual; overlap between
ownership and government.
4. Some features:
5.  The role of the Shareholders'
Meeting is more formal than
substantial (decisions are made by
the founder and not always
formalized, such as the Family
Assembly and the Family Council): in
many cases, assembly meetings are
organized during Christmas dinners
when the family is reunited.
6.  The role of the Board of
Directors: it does not have an
important role is only formal. Not
substantial

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  Criticality in small businesses:
generational change The conflict
between majority and minority
shareholders is low

To understand importance of
Corporate Governance in Small
Business -> need to explain different
role between institutional and non-
institutional governance bodies.
The presence of the trade off between
institutional and non-institutional
governing bodies (assembly and family
council) requires the adoption of CG
rules
GC becomes fundamental in small and
micro enterprise:
1. For a greater balance between
family system and business system
(family agreements, family council
2. More transparency,balance,
attention to social purposes
3. To cover the interests of all
stakeholders.
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Theoretical reflections on corporate
governance
Economic value: narrow vision ->firm’s
purpose is profit (property-management
conflicting relationship)
Social value: more complex vision->
company have to protect multiple
interests, not just propriety’s interests -
> new vision of CG (shareholder-
stakeholder relationship. The company
is a socio-economic system oriented
towards survival). Social value – we
have a lot of actors (owner, managers,
stakeholders(employees, providers), in
this case a firm should have good
relationship with all the stakeholders
and respect them. This is a new concept
of CG.
Sustainable approach for survival of
compony
АкционерShareholder View - Company
oriented to creation of economic value.
goal of company is to satisfy interests of
shareholder: economic purposes/ no

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other purposes external to the
proprietary system
Stakeholder View
Заинтересованная сторона
(internal and external actors)- purpose
of company is creation of socio-
economic value.- based on ethical
principles and corporate social
responsibility/ The distribution of value
includes a larger number of
stakeholders.
Three theories are part of this
theoretical line:
 Managerial theory
 Agency theory
 Property rights theory.
Managerial Theory of company is based
on dominant role of management
(real economic subject of company).
 Management must maximize profit in
the interest of property.
 If rise the profit, the company grow
(See Bearl and Means and Mace).

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If profit increases, owner is satisfied,
but manager is also satisfied because
he maximizes his utility (lfor ex,
compensation, power, prestige and
status).
Baumol (1959) argues
...The managers tend to maximize sales
revenue.
If the company is large, it will be more
prestigious to be the manager, and the
salary level will be higher.
Marchionne has increased the size of
the fiat to increase its prestige and
performance for the Agnelli family.
Williamson (1964)
aims at a minimum of profit, in order to
avoid negative reactions versus
shareholders and the financial market.
The approach is the Market for
corporate control: more profit, more
stock grows

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Marris (1964) states that management
is oriented towards increasing the
size of firm to increase its utility
function, but it differs from them in
that it offers a theory capable of
balancing the utility function of
management with the utility function of
the shareholder ..
Management must seek a financial
balance between the company's debt,
liquidity and profit retention rate

Jensen and Meckling (1976) first

introduced the concept of the firm as a
'legal fiction'.

Principles:

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 Incomplete contracts: the Principal
does not have the information needed
to evaluate the activities of the Agent
(information asymmetry), so that the
Agent can enable opportunistic
behaviour, using information that the
Principal doesn't have. We have two
situations:
 Adverse selection (ex-ante
opportunism): before the formalization
of the contract
 Moral Hazard (ex-post
opportunism): after the formalization
of the contract

Eisenhardt (1989), analyzed the

relationship between agent and
principal risk:
Behavior-based control reduces the risk
of adverse selection that arises in the
pre- contractual phase (adverse
selection)

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• Control based on results reduces the
risk of moral hazard arising in the post-
contractual phases (moral hazard).
The adverse selection, or advers
selection, is the presence of an ex ante
opportunistic behavior activated before
the formalization of the contract, or of
the relationship between the parties;
Moral hazard or moral hazard indicates
forms of opportunism that occur as a
result of the unobservability, by the
Principal, of the service entrusted to the
Agent.
In cases of Adverse selection:
.....control over behavior is required.
This control can be activated when:
 you have an efficient information
system;
 the agent is risk averse;
 there is no conflict of purpose
between principal
and agent, or it is minimal;
 the agent's work is more planned;

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  the contractual relationship between
principal
and agent is long-term.
In cases of Moral Hazard the control is in
the results. The required following
conditions:
• the principal shows limited or even
adverse risk
neutrality;
• the greater the conflict of purpose
between
principal and agent;
 the results are more measurable;
 agency relationships are short-term.
 How does the agency theory solve
the problem of information
asymmetry?
  Incentive mechanisms
 Extrinsic (monetary) incentives
 Intrinsic (non-monetary) incentives
  Monitoring and controlling systems
This are the agency’s costs.
 The perfect agency 'relationship
is whare it is not agency’s costs.
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Agencies costs:
1 Costs of monitoring, control and
incentives. These are costs borne by the
Principal to monitor, measure, evaluate,
regulate and encourage the behavior of
the Agent
2 Residual costs (residual loss) are
costs that the Principal incurs for
conflicts with the Agents
3 Reinsurance costs (bonding),
incurred by the agent to reassure the
owners on the correctness of their
behavior
THE RESIDUAL RIGHTS
According to Alchian and Demsetz
(1972), market transactions revolve
around the system of property rights.
The theory tries to specify who is the
person who can exercise the right to
property.
The residual rights is divided in three
foundamental rights:
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 Right to determine the resources’
destination;  right to enjoy the
resources’ use;
 right to assign or delegate each of
these rights
The Theory of Property Rights, with a
view to the trade off between ownership
and management:
on the one hand, it enhances the
concept of ownership as a right to the
residual;
on the other hand, the manager,
providing an appropriate economic
incentive to the holders of rights and
controlling the residual right on what
remains in terms of results (residual
claimant).
Socio economic approach
The theoretical line of socio-economic
value creation focuses on relations
external to the company.

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 The number of actors is growing:
shareholders, managers and all other
stakeholders.
 The theories on the socio-economic
approach introduce a open vision of
corporate governance instead restrict
vision rise in Agency theory perspective
Value is no just economic profit, but
represents a multidimensional factor,
made up of social and economic
elements (socio-economic nature of
value).

Stakeholder means drive of interest (or

company interlocutor)» the groups
without the support the company not
exist"
>>
The Stakeholder Theory argues that the
nature of business relationships is not
only economic, but also institutional and
social ones.

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The corporate governance approach is
based on relationships between all
stakeholders.
A first theoretical systematization of the
Stakeholder Theory is by Freeman
(1984). The theory protects the interests
of all stakeholders.
 There are three levels of analysis :
1 Rational - identification of
supersystems as a function of factors:
criticality of resources; decision-making
influence / If critical and influential, the
supersystem is relevant
2 Process - The entrepreneur activates
a relational process with all the
supersystems. It establishes strong
relationships with relevant
supersystems that are defined as
priorities.
3 Transactional - action strategies
with relevant supersystems are defined
La Stakeholder Theory

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The influence of the stakheolders
influence: Negotiating power of
stakeholders / Intensity of competitive
pressures.
La Stewardship Theory proposes a
radical rethinking of corporate
governance theories.
 focus on relationship with managers.
The steward is top / good person.
Relationship with managers changes:
behavior of managers is not
opportunistic, but there are other
values: ethical, social, behavioral..
 agency theory = risks are on property,
stewardship says risk is on the
steward because he can be fired.
Ownership, on the other hand, being
able to diversify and reduces the risks.
 Starting the stewardship change the
perspectives respect to the Theory of
the Agency..
The stewardship was born with the
arguments of Goshal who criticizes the
theory of the agency.
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 For Ghosal, the agency theory
influenced future managers by
transmitting agency's values to
American business schools. Ghosal ask
Agency Theory as bed theories
critical factors of agency theory are:
 stock options;
 Strong control system;
 Prevalence of Porter's theories in
competition studies..

Ghoshal criticizes: -> Friedmanian

liberalism: a bleak vision of life limits
freedom and trust -> Economic
liberalism like WILLIAMSON: control
activity stimulates instead of limiting a
brake on opportunism
The manager must be able to manage
the psychological, sociological and
economic aspects related to corporate
governance.  Managers are
considered property stewards, rather

44
than men interested in maximizing their
own interests:
The steward sayd: “to do a good job, to
be a good steward of the corporate
assets”.
Socioemotional Wealth Theory
The socio-emotional approach starts
from the assumption that ownership is
not motivated only by economic
interests, but by the survival of the
company. Ownership may prefer
survival over profit.
 The final goal is not profit, but the
creation of socio- economic, indeed
socio-emotional value.
Financial goals are considered
instrumental for achieving socio-
emotional well-being;
 Family businesses that emphasize
socio-emotional well- being and
renounce financial well-being in favor of
social and emotional well-being

45
The economic entity preserves socio-
emotional well-being, through:
 satisfying needs such as affection and
family ties;  continuity and diffusion of
family values;
 continuation of the family dynasty;
 conservation of the share capital.
le 5 dimensioni

The Business Roundtable Statement

46
The Business Roundtable is a non-profit
association: the members are CEOs of
large and listed US companies(+200
CEO)
[Link]
 Since 1978, the Business Roundtable
has periodically published its vision of
governance. The approach has always
been to protect shareholders: or the
"corporations exist principally to serve
shareholders"
In recent times, perspectives have
changed:
creating value for shareholders is not
the only goal of companies. Companies,
on the other hand, must also:
  Invest in their employees, protect
the environment.
  To have a correct and ethic
bheavior with suppliers;
  create long-term value for
shareholders.
 Every stakeholders are important. We
are committed to providing value to all
47
of them, for the future success of our
companies, our communities and our
country.
Purpose of Corporation – to promote an
economy that serves all amjericans
The new intentions:
"Offering value to our customers.".
"Investing in our employees.".
" To relate fairly and ethically with our
suppliers.". “Supporting the
communities in which we work”.
“Generating long-term value for
shareholders”.
Who could change the situation are only
the shareholders,
not the CEOs! Shareholders not
managers.
Only shareholders can reward
companies that have virtuous behavior
on all the issues highlighted:
social, environmental, behavioral....

48
Shareholders must reward business
models that produce value for the entire
company
Adriano Olivetti and Steve Jobs were two
dreamers who had a vision of the
passionate life linked to art, human and
social values regardless of economic
values. Steve, like Adriano, wanted to
change the world:
 "Only those who are crazy enough
to think about changing the world
really change it"
Olivetti sayd: “I want the Olivetti
company to be not just a factory, but a
model, a lifestyle. I want it to produce
freedom and beauty because they,
freedom and beauty, will tell you to be
happy ‘‘
Adriano Olivetti's teaching conforms to
the conceptualizations of
Socioemotional Theory: Olivetti
introduces a romantic and at the same
time revolutionary vision of business.
Olivetti was the first to anticipate best
pcaryices as an average remuneration
49
of the CEO with that of the employees;
respect for employees and for the
workplace.
an evolutionary perspective vs
sustainable governance
In this way we want to describe our
speech in three interconnected stages.
This stages are characterized by strong
evolution over time:
The first phase was the enlargement of
corporate responsibility. In this moment
was important the conflictual
relationship between principal and
agent as owner and management. The
second phased was the attention to all
the stakeholder. In this way the
company becomes an institution not
only profit oriented, but to generate
social value for all stakeholders.
Born a new company’s idea supported
by new purpose such as the survive
over time.
In the last phase the attention pass from
social focus to institutional focus. In this
way are important some consideration
50
about the law system and lust but not
list the find a new relationship law
and economics topics.
The first stage:
The Opportunism’s era.
The values was the profit;
The relationship was the conflict and
the opportunism between principal and
agent
The theoretical background was the
Agency Theory and Theory of residual
rights;
The coordinator mechanism was the
residual right
The second stage:
The Stakeholder’s era.
The values was the redistribution of
social and economic value;
The relationship was the equilibrium
between all stakeholders
The theoretical background was the
Stakeholder theory, Stewardship theory
and Social Emotional whelth theory.
The coordinator mechanism was the
faith and confidence.
51
The third stage:
The purpose’s era.
The values is sustainability. Businesses
must push the diffusion of sustainable
values into the environment; The
relationship is based on the
equilibrium between company’s purpose
and actions and environmental The
theoretical background is the brand
activism. The brand activism consists in
the firm's commitment to promoting
improvements to reduce social inertia in
order to favor society
The coordinator mechanism the
sustainability’s purpose.

The interpretative keys of sustainability

governance
The new idea of enterprise is based on
three significant factors: a)Property
becomes a proprietary system: in
the modern studies on CG the
ownership is a firm’s external system. It
is a complex system. In this way change
the background of Agency: we have a
52
new relationship between principal and
principal, not only Principal and Agent.
The relationship, in fact is based
between the majority shareholder and
minority shareholder: Principal versus
Principal. This is second level of
agency theory.
b)The study of the relationships within
the proprietary system we must
introduce a new perspective of the
relationship between Law and
Economics.
c) Change the idea of finance toward
sustainable finance, consequently also
towards a sustainable governance
We must build a new idea of sustainable
enterprise based on three new criteria:

53
Law and Economics
Guido Calabresi sustain the strong
relationship between Law and
Economics. Generally, the market’s
changes enforce a revision of the law.
In Italian, we have more examples of
low correlation between law and
economics. This missing is a big
problem for understanding the rules for
businesses’ good governance.
•The application of Best practices
in CG: in Italy the businesses adopt the
Anglo- Saxon best practices but must
modify this best practices at our civil

54
law mechanism. For example: despite
the Italian companies adopt a monistic
governance model, the presence of an
external control board that is typical of
the horizontal dualistic model still
resists. In this way the legal framework
is not aligned with the governance
models. •The absence of technology
in the covid’s era: Assembly or Board
of Directors operate according to old
laws rules. In this case is it possible
record the overlap between the new
technological applications and the
ménage of board. In Italy it is not
possible to hold the extraordinary
assembly in remote modality. In Italy
there aren’t regulations for the hold the
extraordinary shareholders' meetings in
distance but is necessary the notary
presence. This approach is inadequate
in this economic moment.
•The interlocking directorates
phenomena: The introduction of
independent director in the Board of
Italian firms is in contrast with the
absence of legislation on interlocking
55
directorates. In Italy for example we
haven't a regulation about the case of
interlocking directorate (exists only
regulation for the financial firms);
The economic content does not
compliance with the legal scheme.
We have to introduce a new
approach based on major
relationship between law and
economics.

Double materiality: This graph shows

the concept of double materiality in
which the role of firms influence the
environment and be influenced by it. In
the case of Brand activism, the firms to
have a active role becose influencing
the environment. To date, Europe has
launched active policies on this point.
The sustainable finance is to choose
which asset operate not only according
to the possible profits, but also
considering the social impact. All this
changes both the nature of the

56
investment and the mission of the
company in qualitative terms
->
The company's performance is
transformation: integration /
inclusion of extra-financial
objectives and expansion of the
"mission" of the enterprise
->
Sustainable Corporate Governance
The purpose of a company is to engage
all its stakeholders in shared and
sustained value creation. The best
way to understand and harmonize the
divergent interests of all stakeholders is
through a shared commitment to
policies and decisions that confirm the
firm’s long-term prosperity
Sustainable success: objective that
guides the action of the management
and consists of creating long-term
value for the benefit of shareholders,
taking into account the interests of

57
other stakeholders relevant to the
company
EU initiatives
1 The new classification of
sustainability activities
New regulation that establishes and
promotes sustainable (2020/852) The
new regulation also ranks the eco-
soseinability activities (cd. sustainable
finance)
2 Non-financial Disclosure
The Non-Financial Reporting Directive
has introduced, for larger companies,
the mandatory publish information on
sustainability, regarding social and
environmental factors
3 Disclosure on ESG
The new regulation of UE 2019/2088
52 / 5000 requires institutional investors
and advisors to communicate if and how
the products they sell in the European
Union markets integrate considerations
on sustainability issues
58
4 Benchmark
Regulation 2019/2089 requires index
providers to disclose information in the
application of sustainability issues in the
construction of benchmarks.
On 23 February 2022, the EU
Commission adopted a proposal for a
Directive on corporate
sustainability due diligence.
The aim of this Directive is to foster
sustainable and responsible
corporate behaviour and to anchor
human rights and environmental
considerations in companies’
operations and corporate
governance.
What are the benefits of these new
rules?
For citizens
 Better protection of human rights,
including labour rights.
 Healthier environment for present
and future generations.
 Increased trust in businesses.
59
  More transparency enabling
informed choices.
 Better access to justice for victims.
For companies
 Harmonized legal framework in
the EU, creating legal certainty
and level playing field.
 Greater customer trust and
employees’ commitment.
 Better awareness of companies’
negative environmental and
human rights impacts.
 Better risk management and
adaptability.
 Increased attractiveness for
talent, sustainability-
oriented investors and public
procurers.
 Higher attention to innovation.
 Better access to finance.

For developing countries

60
• Better protection of human rights and
the environment.
• Increased stakeholder awareness on
key sustainability issues.
• Sustainable investment.
• Improved sustainability-related
practices.
• Increased take-up of international
standards.
• Improved living conditions for
people.

What are the obligations for

companies and their directors?
This Directive establishes a corporate
due diligence duty.
The core elements of this duty are
identifying, bringing to an end,
preventing, mitigating and
accounting for negative human
rights and environmental impacts in

61
the company’s own operations, their
subsidiaries and their value chains.
The Directive also introduces duties for
the directors of the EU companies
covered. These duties include setting up
and overseeing the implementation of
the due diligence processes and
integrating due diligence into the
corporate strategy.
In addition, when fulfilling their duty to
act in the best interest of the company,
directors must take into account
the human rights, climate change
and environmental consequences of
their decisions.

Businesses play a key role in

creating a sustainable and fair
economy and society.
A third of companies recognise the need
to act and take measures to address
adverse effects of their actions on
human rights or the environment, but
progress is slow and uneven
62
he sustainability disclosure has
attracted the interest of researchers and
policymakers to examine the concept of
a green economy.
Consequently, the studies focused on
environmental, social, and
governance (ESG) disclosure are an
area of great interest.
ESG disclosure provide strong evidence
of companies' commitment to
environmental and social disclosure.
Various studies have analysed various
aspects of ESG disclosure:
1.
AgroupofstudiesexaminedtheextentofES
Gdisclosureandrevealedthat,althoughthe
levelof
ESG disclosure is still low, it has
increased significantly over the years
2.
Otherstudiesinvestigatedthedetermina
ntsoftheextentofESGdisclosure 3.
MoststudiesfocusontheimpactofESGdiscl
osureonfinancialperformance
63
The research’results:
1. ❖ 1. Presence of women:
significant and negative relationship
“being a woman director does not
necessarily mean having a different
outlook” . Therefore, it is not gender
that determines a positive level of
ESG disclosure. Woman director has
more characteristics, not only her
gender, but also specific expertise or
experience, to be an executive or a
non-executive director (future
studies...)

1. ❖ 2. Average age of the board: no

relationship The average age of
the board is not a significant
factor. To demonstrate how
these issues are
“transgenerational”

❖ 3. Presence of the CSR

Committee: significant and positive
relationship A board with an

64
environmental committee is expected to
be more environmentally responsive

❖ 4. % independent directors:
significant and positive relationship
Independent directors influence
transparency and voluntary disclosure
Drivers of Sustainable Governance are
ENVironmental, Social, Governance.
Reflections for a sustainable
governance
1 Composition and diversity of the
board - An increase in diversity (not
just gender) could help more
sustainable dissemination
2 Stakeholders engagement -
Greater involvement of stakeholders in
corporate governance could reduce the
risks and negative impacts of
sustainability
3 Ethic behavior in firms A Corporate
Governance drive by ethical behaviors
improve the sustainability and the

65
longevity firms and brings the company
closer to the market.

Principal ( owners , shareholders,

managers) – delegates to agent
Agent –
Opportunistic situation between
principal and agent – after the
agreement we define situation

Pre-contractural phase – I must control

behavior

5th Oct

Stakeholder Theory
66
Property is subsistent

Exam – what is the risk situation in

Stuward teory ->

Invest in new skills, capabilities,

improvement the relationship between
them …

_________________
Genotype – identity gens (very diff to
discover firms’ identity - > fixed
structure
Phenotype – image, the expression ->
strategy

First we need to understand the

connection between life of firms , life of
firms’ workers

Generational change
Culture of generation is based on __
Break the relationship between new and
old generation
In Italy a family Pakt –
67
The theory of evolution –
Porter’s analysis – we analyze the
competitive arena, Blue Ocean -

In Lamarck’s – people adapt

environment to survive – we consider
link between biological organism and
the environment

Brunello

Complementary factors ( territorial

factor \ entrepreneurial factor)

Each context influences the corporate

governance system.
In turn, the evolution of companies
influences governance.
To study governance systems we need
to understand the evolution of firms and
then of the reference context

68
Have you ever asked yourself if there is
a link between on biological
organizations studies and firms?

To find this connection we must to study

the firms’ evolution
The firms’ evolution has a strong
connected at biological framework:
• The life of firms, specially in family
firms, is linked to the life of
entrepreneurs and his families and in
general of CEO or others apical persons;
• There is a strong relationship between
a family’s life and a firm’s life, or the life
of apical managers;
• Family firms change over time,
because changes its members and
family ties loosens. As it happens in
families.
We want to introduce a conceptual
model to study the firm’s evolution over
time

69
The evolution of family firms
What is the generational change?
The generational change is a critical
moment in which a new generation of
shareholders and directors substitute
the old generation, in the management
of the company. Generally, this is
happening with the succession between
father and children.
Generational change introduce the
problem to the survival and long-term
survival.
• To understand the impact witch the
generational change could have on the
life of a family firms is important to
study the firms’ evolutionary
mechanisms.
If we want to study the firm’s
evolution over time we have to
consider a generational change of
family businesses:

70
During the generational shift could
improve some conflicts between old
and new generations
To resolve the generational conflict is
necessary to manage the trade off
between this following aspects

The Life cycle

market as competitive arena:
Porter or blu ocean Kim...
the Theory of evolution
A model to analyze evolution of
Family firms
genotype and phenotype

71
genotype is firm's genetic code. In
biological organism's genotype is DNA
Phenotype- is firm’s image. In biological
organisms phenotype is expression of
DNA (hair color, eyes color).
relationship between genotype and
phenotype influences the firm’s
evolution
GENOTYPE is set of genes that compose
the chromosomes of biological
organism. Is DNA of biological organusm
PHENOTYPE is genotype’s manifestation
that compose the chromosomes of
biological organism.
the environment affects phenotype
To understand application of
genetic approach we must
considerer approaches: Darvin and
Lamarck
This theoretical model start from
comparison between the Darwin’ and
Lamarck’ theories.

72
In Darwin's study species evolve by
natural selection. The strongest
survives.
In Lamarck's studies, species survive by
adapting to environment.
Our model -> Lamarck's studies: the
family firms survives by adapting to
the environment.
Lamarck model ->biological organism
needs to be open versus environment.
So, the weakest firms can survive in
relation to establish an active dialogue
with the environment. The picture
shows this situation:
• Lamarck model-> giraffes adapt to the
environment / connected with
environmental and modified their
genetic expression.
• Darwin model -> only the strong
giraffe's survival, instead the smaller
dead.
My theoretical model is composed
by three dimensions:

73
1 Strategic dimension or phenotype
2 Relational dimension or
interactional;
3 Structural dimension or genotype
Identity =soul of a person
image = external expression of a
person
The structural or genotypic dimension
1) family firm genotype
represents value system and
tangible and intangible resources
in the territory and ownership.
2) Genotype =firm’s identity
=DNA =structural dimension of
businesses.
3) structural dimension is not
static, but it changes over time.
Genes in biological organisms
(firms) change and adapt to the
environment.

Structural dimension is linked to two

factors :
74
-entrepreneurial factor: firm's
ownership changes over time through a
generational change. The ownership
forwards its genotype;
• territorial factor: tangible and
intangible resources of territory which
composes firm's DNA.
firm’s Genotype = combination of skills
and values of the territory and the
entrepreneurs’ factors
• The values witch the firms receives
from the territory by the entrepreneur,
change and adaption to the
environment
• The biological organism have to
constantly changing his genes to
survive. (dynamic approach)

The relational dimension

 The family business is embedded in
the territory.

75
  The territory represents the place
where the firm to do relationship
with the outside actors.
 The enterprise-territory relationship
influences the evolution of the firms
and its survival.
 The company survives if it can
respond to the stimulations from the
environment
 All firms have their relational
dimension.

The relational dimension of the model

explains the relationship between the
Firms and the territory. The relational
dimension is composed by two different
complementary stages
1 Firms versus Territory
Institutionalization firm:
When the company promotes the
development of his context. The
territory and its resources are
developed through the push firm;

76
2 Territory versus Firms
Contextualization firm
When the territory favors the
development of the company. The
company uses skills present in the
territory.

The
The Consortium of Brunello di
Montalcino is an example of
institutionalization process.
Born in 1967, on the initiative of 37
family entrepreneurs.
The Consortium is composed of over
300 Firms. The consortium has given
value to the territory. After the born
of Consortium of Brunello the area has
developed: the value of land has
increased; tourist numbers have
increased. Today the territory of
Brunello is one of the most important in
Italy.

77
Consortium of Brunello as an example of
institutionalization
The Consortium of Brunello di
Montalcino is an example of
institutionalization process.
Born in 1967, on the initiative of 37
family entrepreneurs.
The Consortium is composed of over
300 Firms. The consortium has given
value to the territory. After the born
of Consortium of Brunello the area has
developed: the value of land has
increased; tourist numbers have
increased. Today the territory of
Brunello is one of the most important in
Italy.

The Borgo Orefici is an example of

contextualization
The Antico Borgo Orefici Consortium is
composed of more then 130 small
family businesses specialized in
goldsmith sector.
By the will of the Spanish Viceroy all
78
firms operating in the goldsmith sector
were located in the specific area of the
city. The firm’s value has grown due to
the institutional choice of locating the
firms in this specific area.
Today the Neapolitan goldsmith is very
famous in the word. A lot of tourists visit
this goldsmith area over time.

The strategic dimension

 The phenotypic dimension

represents the family businesses'
image.
 The image determines the family
firm’s behavior.
 In this way we will introduce the
concept of
strategic dimension.

79
Italian family businesses can identify
two predominant strategic guidelines ;

1) Strategies of creative innovation,

The company is focused in innovation.
Innovation of new products or processes
(exploration).
incremental innovation through
improvement existing products and
processes (exploitation);

2) Strategies based on the tradition

and culture of the territory,
The firm competes with products and
services that enhance the knowledge of
the territory.

80
The relationship between identity
and image: The Beautiful Company
syndrome
The relationship between genetic and
phenotypic influences the firm's
identity. An example from biology is the
androgen insensitivity syndrome, or
syndrome of beautiful woman.
The Morris syndrome is when a
biological organism has a male
genotypic instead has a female
phenotypic. This imbalance is
unnatural. The organism is configured
externally as a woman but in fact has
the genetic heritage of a man.

81
Also in the firms there is, in some cases,
this disorders between genotypic
identity and phenotypic image; for
example when the firms image (its
phenotype), do not correspond to its
value system (genetic).
In this case I could talk about the
Beautiful firms Syndrome!

On the contrary, if the image is aligned

with the corporate identity, they
determine the conditions for survival in
the time of company.
Ferrero has always taken behaviors
consistent with our corporate values.
As Giovanni Ferrero said, "the ties
membership, the historical roots, does
not sever (...) our collective history has
been written without lose the sense of
our identity and is rooted in the territory
(...)”.
In fact, Ferrero has respected all of its
employees and its territory of origin. He
has made major investments in the

82
territory and contributed to its
development.

Eugenio D’Angelo
Sustainability
A sustainable development is a
development that meets the needs of
the present generation without
compromising the ability of future
generations to meet their own needs.
(1983 UN Commission on Environment
and Development) - 2030 AGENDA (17
[Link] GOALS)

83
Triple bottom line (3BL)
The triple bottom line is a business
concept that posits that firms should
commit to measuring their social and
environmental impact—in addition to
their financial performance—rather than
solely focusing on generating profit
(standard “bottom line.”) It can be
broken down into “three Ps”: profit,
people, and the planet.....
DOING WELL BY DOING GOOD

CSR
The European Commission, in its 2001
Green Paper, defined CSR as "the
voluntary integration of social and
84
environmental concerns in their
business operations and in their
interaction with their stakeholders".
Corporate social responsibility (CSR) is
based on the assumption that, at any
given point in time, there is a social
contract between an organization and
society in which the organization has
not only economic and legal
responsibilities, but also ethical and
philanthropic responsibilities (Carroll,
1991-1999)
By doing so, companies gain citizenship
and legitimacy

85
Business Ethics
For some scholars, business ethics can
be framed as the interaction between
the community, the company and the
system of rules.
For others, CSR encompasses ethics to
the extent that business decisions must
be positively received by the social
environment in which the company
operates.

86
A third view, on the other hand, sees
CSR as the result of an ethical approach
to business choices. By acting ethically,
the company accumulates social capital,
which fosters improved corporate
reputation and hence stakeholder trust.
In safeguarding the moral aspects of
honesty, fairness and the preservation
of people's dignity, contingencies have
effects on companies’ life and not
always allow for the achievement of
certain goals. Typically, this occurs
under conditions of business shocks
typical of turnaround processes that are
triggered downstream of the detecting
of a state of business crisis. Consider,
for example, the need to safeguard
business continuity by going through
workforce downsizing. Unless the state
intervenes in economics to protect jobs
in certain contingencies, it is clear that
this arises as an ethical dilemma that
underlies the choice between short-term
welfare, related to worker protection,
and long-term welfare, aimed at
corporate survival. In such cases there
87
can be no absolute ethical choice, but
we will speak of practical or relative
ethics.

In the current global context, many

scholars and managers claim:
firms’ survival depends on
sustainability and sustainable
investment
The recent pandemic period has
accelerated some cultural changes by
imposing greater attention on the issue
of sustainabilityàThe COVID-19
pandemic has highlighted the
interconnections between people, planet
and profits – and particularly between
health, poverty, climate change and the
stability of the global financial system.
Given that sustainability relates to
individual behavior, companies'
behavior and governing bodies decision
(MULTIANNUAL FINANCIAL EU
FRAMEWORK 21-27 and NEXT

88
GENERATION EU – mostly focus on
environmental and social issues)
The integration of environmental,
social and governance (ESG)
factors into INVESTMENT
PROCESSES
Responsible investing
COVID-19 shows ESG matters more
than ever (J.P. Morgan, 2020)

So...What is ESG? ESG factors cover

a high spectrum of issues:
ESG is an umbrella term
• E stands for the environmental
criteria, include attention to
environmental factors and
environmentally friendly behaviors
(sustainable consumption, recycling,
attention to the physical
environment).... Every company uses
energy and resources; every
company affects, and is affected
by, the environment.
89
• S stands for the social criteria,
attention to both the internal and
external social context and public
administration. The company must
operate respecting social needs
(workforce and broader community) ....
Every company operates within a
system populated by different
actors and different tangible and
intangible variables.
• G stands for the governance
criteria, Attention to the internal
system and to all its actors (minority
shareholders, managers, etc). Private
control benefits must be
avoided ....Every company, which is
itself (as some scholar state) a legal
fiction, requires governance.
Starting from this definitions ......
....the ESG is a real new concept or is
refocusing of other conceptualizations?
And do you agree with the needs for
companies to focus on social,
environmental and governance issues?
What do you think about it?
90
Friedman (1970) - The only social
responsibility of business is to
create profit for shareholders.
The ESG topic seems new, but it
underlines and include many aspects
already provided by scientific literature
several years ago. Mostly, it explicitly
considers, in addition to social and
environmental topics, the governance
issues and become a criteria that
investors use to assess companies’
value and determine if they are worth
investing in.
ESG is not CSR
Therefore, the main difference
between the two terms is that ESG
includes governance explicitly,
instead CSR includes governance
issues indirectly, including them in
the social pillar. Furthermore, ESG
deals with investing criteria, rather
than focusing on companies a
behavioral approach
ESG is gaining popularity in the recent
few years. Some people said that ESG is
91
replacing CSR (in both scientific and
practical concerns).

Why and how invest responsibly

How many Asset Under
Management are invested in ESG?
In 2020, $17.1 trillion ($1 out of $3
under professional management) was
invested in ESG in the US – that’s 42%
higher than in 2018 and 25 times higher
than in 1995 – with similar growth
around the world.
Source: GSIA, Bloomberg Intelligence

92
Global ESG assets are on track to
exceed $53 trillion by 2025,
representing
more than 1/3 of the $140.5 trillion of
the total assets under management

Several forces are driving the

growth of responsible investment:

..from a niche into a mainstream

practice...

93
A growing awareness that ESG factors
influence company value, returns
and reputation
The impact of ESG factors on business
performance

Our context (social and economic)

is changing
Paying attention to environmental,
social, and governance (ESG)
concerns does not compromise
returns—rather, the opposite.
Results of >2,000 studies on the impact
of ESG propositions on equity returns
Recent scholars argue that in the
current era the survival of the company
depends on ESG!
In her recent book, “Reimaging
Capitalism in a World on Fire,” Rebecca
Henderson said that capitalism should
be review: “ the companies must adapt
a pro-social purpose beyond profit
maximization and take responsibility for
94
the health of the natural and social
systems”

The impact of ESG factors on business

performance
A strong ESG is linked to value creation
in five essential ways.
(McKinsey, 2019)

95
There are many ways to invest
responsibly: Approaches are typically
a combination of two overarching areas:
 Considering ESG issues when
building a portfolio (known as: ESG
incorporation) -ESG issues can be
incorporated into existing investment
practices using a combination of 3
approaches: 1)Integration -
explicitly including ESG issues in
96
 investment analysis and decisions, to
better manage risks and improve
returns ; 2)Screening – applying
filters to potential investments to
rule companies in or out of
contention for investment , based on
an investor’s preferencies,
values/ethics. 3) thematic- to
combine attractive risk-return
profiles with intention to contribute
to a specific environmental /social
outcome. Includes impasct
investing .
 Encourage investees’ ESG
performance (known as: active
ownership or stewardship)-
investors incourage firms they
already invested to improve their
ESG risk management / to develop
more sustainable practices.
Engagement- discuss ESG issues
with firms to improve disclosure of
issues / can be done individually / or
with other investors. Proxy voting-
express approval or disapproval on
resolutions and proposing
97
 shareholder resolutions on ESG
issues.
ESG Data: who and how measure
ESG?
 ESG ratings providers play an
increasingly important role in the
investment process through their
assessments of companies across
various ESG metrics.
 Understanding which metrics are
evaluated and how they are
assessed is essential to investors
selecting stocks that meet the ESG
criteria they care about.
 ESG Measurement

For environmental, social, and

governance (ESG) ratings, various
agencies construct their scores through
compiling and analyzing multiple
sources, including firm disclosures,
reports from third parties (such as
NGOs), articles from the media, and

98
their in-house research conducted
through interviews and questionnaires
with company employees or executives.
For most data providers, ESG ratings
include an overall ESG score and scores
for each of the three subcomponents (E,
S, and G). Refinitiv ESG (with 7,000+
global companies) MSCI ESG STATS
(with 3,000+ US companies)
Sustainalytics Company Ratings (with
11,000+ global companies)
S&P ESG Trucost (including data from
Carbon Disclosure Project)
Dow Jones Sustainability Index
(RobecoSAM), RepRisk (Incident-Based
Reputational Index)
The literature identify three distinct
sources of divergence between ESG
ratings
 Scope divergence: refers to the
situation where ratings are based on
different sets of attributes

99
 Ø One rating agency may include
some activities, while another might
not, causing the two ratings diverge.
 Measurement divergence refers
to a situation where rating agencies
measure the same attribute using
different indicators.
Ø For example, a firm’s labor
practices could be evaluated on the
basis of workforce turnover or by the
number of controversies cases taken
against the firm.
• Weight divergence emerges
when rating agencies take different
views on the relative importance of
attributes.
Ø For example, gender diversity
indicator may have greater weight
than workforce training

The scope, measurement and

weight divergence are intertwined,
making it difficult to interpret only one

100
ESG rating and can lead to drastically
different outcomes when used to
construct a portfolio.
However, a diversity of opinion is
far more informative than if
everyone said the same thing.
Why?
An investor read the reports of different
providers, use his expertise to evaluate
whose arguments are most convincing
and supplement them with his own
analysis.
The ESG arena is characterized by a
large number of ratings providers
offering a very wide array of data
An ESG investor should begin by
properly categorizing the various types
of data available based on the
information they seek

101
Fundamental.
This category includes ESG data
providers that collect and aggregate
publicly available data (typically from
company filings, company websites, and
nongovernment organizations, or NGOs)
and disseminate these data to end users
in a systematic way. Typically, these
providers do not have a ratings
methodology and do not provide overall
company ESG scores. The user of the
data must determine the materiality of
the data and develop their own
methodology when constructing a
portfolio.
Examples of fundamental providers:
Bloomberg.
102
Comprehensive.
This category includes ESG data
providers that utilize a combination
of objective and subjective data
covering all ESG market segments.
Typically, these data providers will
develop their own ratings methodology
and combine publicly available data as
well as data produced by their own
analysts through company
interviews/questionnaires and
independent analysis. These providers
use hundreds of different metrics across
ESG concerns and apply an established,
systematic methodology to determine a
company’s overall ESG score.

Specialist.
This category includes ESG data
providers that specialize in a specific
ESG issue, such as
environmental/carbon scores, corporate
governance, human rights, or gender
diversity. Given these providers’
expertise in a specific field, they are
103
useful for investors whose objective is to
tackle a particular issue and improve in
that domain.
Examples of these providers are TruCost
(now owned by S&P Global), the
nonprofit Carbon Disclosure Project
(CDP), and Equileap (gender equality
data).

Because ESG ratings are an essential

basis for most kinds of sustainable
investing, the market for ESG ratings
grew in parallel to sustainable investing

104
105
106
Environmental !!!
• Resource use
The resource reduction category
measures a company's management
commitment and effectiveness towards
107
achieving an efficient use of natural
resources in the production process. It
reflects a company's capacity to reduce
the use of materials, energy or water,
and to find more eco-efficient solutions
by improving supply chain
management.
• Emission Reduction
The emission reduction category
measures a company's management
commitment and effectiveness towards
reducing environmental emission in the
production and operational processes. It
reflects a company's capacity to reduce
air emissions (greenhouse gases, F-
gases, ozone-depleting substances, NOx
and SOx, etc.), waste, hazardous waste,
water discharges, spills or its impacts on
biodiversity and to partner with
environmental organisations to reduce
the environmental impact of the
company in the local or broader
community.
• Innovation

108
The innovation category measures a
company's management commitment
and effectiveness towards supporting
the research and development of eco-
efficient products or services. It reflects
a company's capacity to reduce the
environmental costs and burdens for its
customers, and thereby creating new
market opportunities through new
environmental technologies and
processes or eco-designed,
dematerialized products with extended
durability.

Social !!
• Workforce
The workforce category measures a
company's management commitment
and effectiveness towards maintaining
diversity and equal opportunities in its
workforce. It reflects a company's
capacity to increase its workforce
loyalty and productivity by promoting an
effective life-work balance, a family
friendly environment and equal
109
opportunities regardless of gender, age,
ethnicity, religion or sexual orientation.
Moreover, it measures high-quality
employment benefits and job conditions.
It reflects a company's capacity to
increase its workforce loyalty and
productivity by distributing rewarding
and fair employment benefits, and by
focusing on long-term employment
growth and stability by promoting from
within, avoiding lay-offs and maintaining
relations with trade unions.
In addition, it measures to what extent
companies provide a healthy and safe
workplace. It reflects a company's
capacity to increase its workforce
loyalty and productivity by integrating
into its day-to-day operations a concern
for the physical and mental health, well-
being and stress level of all employees.
Finally, it measures training and
development (education) for its
workforce. It reflects a company's
capacity to increase its intellectual
capital, workforce loyalty and
110
productivity by developing the
workforce's skills, competences,
employability and careers in an
entrepreneurial environment.
• Human rights
The human rights category measures a
company's management commitment
and effectiveness towards respecting
the fundamental human rights
conventions. It reflects a company's
capacity to maintain its license to
operate by guaranteeing the freedom of
association and excluding child, forced
or compulsory labour.
• Community
The community category measures a
company's management commitment
and effectiveness towards maintaining
the company's reputation within the
general community (local, national and
global). It reflects a company's capacity
to maintain its license to operate by
being a good citizen (donations of cash,
goods or staff time, etc.), protecting
public health (avoidance of industrial
111
accidents, etc.) and respecting business
ethics (avoiding bribery and corruption,
etc.).
Governance !!
Management
The board of directors/board structure
category measures a company's
management commitment and
effectiveness towards following best
practice corporate governance
principles related to a well-balanced
membership of the board. It reflects a
company's capacity to ensure a critical
exchange of ideas and an independent
decision-making process through an
experienced, diverse and independent
board.
The board of directors/board functions
category measures a company's
management commitment and
effectiveness towards following best
practice corporate governance
principles related to board activities and
functions. It reflects a company's
capacity to have an effective board by
112
setting up the essential board
committees with allocated tasks and
responsibilities.
The board of directors/compensation
policy category measures a company's
management commitment and
effectiveness towards following best
practice corporate governance
principles related to competitive and
proportionate management
compensation. It reflects a company's
capacity to attract and retain executives
and board members with the necessary
skills by linking their compensation to
individual or company-wide financial or
extra-financial targets.
Shareholders
The shareholders/shareholder rights
category measures a company's
management commitment and
effectiveness towards following best
practice corporate governance
principles related to a shareholder
policy and equal treatment of
shareholders. It reflects a company's
113
capacity to be attractive to minority
shareholders by ensuring them equal
rights and privileges and by limiting the
use of anti-takeover devices.
• Vision and strategy
The integration/vision and strategy
category measures a company's
management commitment and
effectiveness towards the creation of an
overarching vision and strategy
integrating financial and extra- financial
aspects. It reflects a company's capacity
to convincingly show and communicate
that it integrates the economic
(financial), social and environmental
dimensions into its day-to-day decision-
making processes.

ESG is a set of value-relevant

factors, critical to a company’s
long-term value.

114
ESG is both extremely important
and nothing special (Edmans, 2022)
ESG is “extremely important”
because any practitioner should care
about the drivers of long- term value,
particularly (for practitioners who are
investors) ones that are mispriced by
the stock market.
ESG is “nothing special”: ESG is no
better or worse than other factors that
drive long-term value.

ESG has helped change the

behaviors of companies and shift
our thinking.
The rise of ESG investing can also be
understood as
a proxy for “how markets and
societies are changing”

Does this «change» affect all

companies?

115
How could SMEs and micro-firms,
for example, respond to ESG
issues?
SMEs and micro-firms are not
considered by most of the active rating
providers, but their role is fundamental
(particularly for environmental and
social issues)
Despite the importance of ESG factors
for firms, SMEs and micro-firms do not
seem yet to be the focus of analysis,
since the main literature results are
based on listed companies or
institutional investors (SRFs - Socially
Responsible Funds)
Althoughtheshareholdersdonotdirectlydr
ivethecompany,theyhavedifferent ways
to influence the BoD, such as:
 – exit (i.e. selling shares – with the
possible effect of activating takeover
processes),
 – loyalty (i.e. holding shares)

116
  – and voice (i.e. communicating with
management).
̈ Shareholder activism is defined as
engaging with company
management and influencing their
behavior, advocating policy changes,
and impacting their overall conduct.
Adopting activist proposed strategies
is expected to help shareholders
maximize wealth (Gillan and Starks
2000; Sjöström 2008).
̈ Bernard Black (1990) defines it as
formal or informal monitoring of the
corporate management.
Definition and tools
an activist shareholder can have socially
motivated goals along with financially
motivated (Judge et al. 2010).
Shareholder activism in connection with
corporate governance, primarily issues
in corporate governance are the drivers
of shareholders activism (Carleton et al.
1998; Bizjak and Marquette 1998).

117
Connection (linkages) between these
two phenomena -> shareholder activism
and corporate governance, can be
established theoretically through
agency cost (Berle and Means 1932).
For a single owner, it is easier to
monitor management and replace if not
satisfied with the performance, which is
not possible in case of disperse
ownership structure (Rock
1990; Heard 1987).
In some cases, shareholder propose
policy changes or disclosure on some
issues.
Investors believe that these changes
may promote more effective corporate
governance (including more reliable
financial reporting) and that good
governance enhances shareholder
value.
Shareholder voice has the goal of
encouraging some types of changes,
such as:

118
1) Change BOD composition (increase
board diversity or the % of independent)
2) Change of the BOD oversight of
certain functions (audit and risk
management)
3) Change of company’s citizenship
behavior (Social and Environmental
engagement) 4) Change in
compensation plan
Now we will focus on this latter topic:
the Say On Pay (SOP)

Say On Pay
(SOP) mechanisms - one of regulators’
tools to mitigate conflict of interest
arising between shareholders (as
principals) and managers (as agents),
about executive compensation issues.
According to optimal contracting
theory, efficient remuneration contract
might effectively overcome agency
problems... but managerial power has
proven to heavily influence the pay

119
 setting process, turning it to its
interest.
SOP grantees shareholders the right
to vote on a company’s executive
compensation program ( policy)
and/or on executives pay, at the
annual general meeting (AGM)
According to the premises, the
introduction of SOP rules may be
considered as an additional channel
for shareholders’ voice, improving
their monitoring power and increasing
their activism.
 SOP is a relatively recent
phenomenon, having been first
introduced by the UK Government
in 2003, and later adopted in other
countries, such as Australia (2005)
and United States (2011),
according to different models and
shareholders involvement levels
 ̈ practice of submitting executive
compensation to shareholders’
exam/ evaluation should increase the
accountability of directors to
120
 shareholders and leads to more
efficient contracting on
remuneration issues
 ̈ Moreover it should positively
influence the transparency on
executive pay and lead to more
“balanced” (or at least not totally
misaligned) compensation programs
and tied to the performance and
risk profile of the companies
Companies’Actors -> Express their
“voice” on remuneration issues

 – Shareholders (controlling owner(s)

and institutional
investors)
 – Governance bodies (BoD and
REMCO)
 – Executives (CEO and Top
Managers)

121
ExternalActors - Contribute to
define high level principles and
market standard
1.
o – Proxy Advisors, asset
managers, institutional
investors/asset
manager associations, other
organizations and think tank
o – Legislator, Supervisory and
Regulated Markets authorities

There is not a single model of SOP:

̈ With reference to its source, SOP may
be request by the law, by applicable
listing rules or either by corporate
governance codes/principles
̈ According to its object, SOP may
consist of an “ex ante” or “ex post”
evaluation:

122
  – in the first case shareholders are
called to vote on a
program/policy/proposal
 – in the second one they are called
to express their view on decisions
already taken (i.e. implementation of
a given compensation program)
̈ Finally, if we look at SOP effects,
we may distinguish between a
binding (mandatory) and a merely
advisory/consultative vote

The majority of jurisdictions set forth

a requirement or recommendation for a
binding or advisory shareholder vote on
remuneration policy.

123
Key: L = requirement by the law or
regulations; R = requirement by the
listing rule; C and ( )= recommendation
by the codes or principles; "-" =
absence of a specific requirement or
recommendation
Requirement or recommendation for
shareholder approval on remuneration
policy

124
Most jurisdictions have now established
a role for shareholders to have a say on
remuneration
policy and pay levels, with 82%
currently having provisions in place
related to binding or advisory
shareholder votes on remuneration
policy.
Binding votes on remuneration amounts
have also become common (48%), with
another 22% of jurisdictions requiring or
recommending advisory votes.

125
Besides the classification between
binding and non- binding, there are
wide variations among “say on
pay” mechanisms in the scope of
approval, mainly with regard to two
dimensions:
– voting on the remuneration policy
(its overall objectives and approach)
and/or total amount or level of
remuneration;
– voting on the remuneration for
board members (which typically
include the CEO) and/or for key
executives
Requirement or recommendation for
shareholder approval on level/amount of
remuneration

126
On the other hand, the trend toward
increased transparency of company
remuneration policy and remuneration
levels has continued over the last two
years. Nearly all jurisdictions surveyed
now have a requirement or
recommendation for the disclosure of
the remuneration policy and the level/
amount of remuneration at least at
aggregate levels. Disclosure of
individual remuneration levels is now
required or recommended in 88% of
jurisdictions.

127
SOP rules were introduced in UK in
2002, following the debate introduced
by the Greenbury Report (1995).
 ̈ The 2002 Regulations made it
mandatory for listed companies
incorporated in Great Britain to
prepare for each financial year a
directors’ remuneration report,
subject to shareholders scrutiny at
every annual general meeting (non-
binding resolution).
 ̈ In 2013 rules changed according,
requiring:
– a binding shareholders’ vote on
the company’s general policy for
Directors’
remuneration and
– an advisory vote on the ongoing
implementation of the policy
approved, as reported by the BoD at
the end of each financial year.
SOP rules in US were introduces in 2011
In the context of the Dodd-Frank Act

128
reform (Dodd- Frank Wall Street Reform
and Consumer Protection Act).
̈ TheDodd-FrankActintroduced:
§ an advisory, non-binding,
shareholders’ vote on the
compensation paid to named
executive officers (the CEO, CFO and
top three most other highly
compensated executive officers) in the
prior fiscal year (the SOP vote);
 § a vote to determine how often
(every one, two or three years) the
SOP vote should be held (the
“frequency vote”, requested at least
once every six years);
 § a vote to approve so-called
“golden parachute payments”
triggered by an acquisition, merger
or other similar corporate transaction
(the golden parachute vote).
SOP rules in Australia were introduced in
2005, requiring for a non-binding
shareholders’ vote on remuneration
policies. In 2011, new regulations were
129
adopted to strengthen the mandatory
non-binding vote with the "Two-Strike
Rule”;
̈ The Two-Strike Rule provides
shareholders an opportunity to "spill
the board" if the company
remuneration report receives a
negative reception at two
consecutive AGMs:
 – The "first strike" occurs when a
company receives a "no" vote of
25% or more of the shareholder
votes cast on its remuneration
report: the subsequent remuneration
report must explain the board's
response and proposed action or
inaction.
 – At the next AGM, upon receiving a
second consecutive "no" vote of
25% or more on the remuneration
report (the "second strike"), the
shareholders will be required to
vote on a "spill resolution" at the
same AGM, that will determine
whether the company's directors will
130
 need to stand for re-election at a
"spill meeting."
SOP rules in Australia were introduced in
2005, requiring for a non-binding
shareholders’ vote on remuneration
policies. In 2011, new regulations were
adopted to strengthen the mandatory
non-binding vote with the "Two-Strike
Rule”;
̈ The Two-Strike Rule provides
shareholders an opportunity to "spill
the board" if the company
remuneration report receives a
negative reception at two
consecutive AGMs:
 – The "first strike" occurs when a
company receives a "no" vote of
25% or more of the shareholder
votes cast on its remuneration
report: the subsequent remuneration
report must explain the board's
response and proposed action or
inaction.
 – At the next AGM, upon receiving a
second consecutive "no" vote of
131
 25% or more on the remuneration
report (the "second strike"), the
shareholders will be required to
vote on a "spill resolution" at the
same AGM, that will determine
whether the company's directors will
need to stand for re-election at a
"spill meeting."
In Italy the SOP mechanism was
introduced in 2010, following the EC
Recommandations, by Article 123-ter of
the Leg. Decree N. 58/1998, that came
into force, for the first time, during the
2012 AGMs.
̈ Accordingtoart.123-
terTUF(preSRDII):
 - At least twenty-one days prior to
the date of the AGM, Listed
Companies were
requested to publish a report on
the policy regarding
remuneration and fees paid;

132
  - The AGM was requested to express
and advisory vote on the
remuneration policy
described in the first section of the
report;
 - The report was required to be
distinct in two separate sections:
Ø the first explaining the company’s
remuneration policy at least for the
following year and the procedures
used to adopt and implement this
policy;
Ø
thesecondillustratingthefeespaidduri
ngthefinancialyearofreference.
In 2010, the Italian legislator therefore
opted for the “weaker” solution on
SOP allowed by EC Recommendations,
that allowed member States to choose
between a binding or an advisory vote.
̈ Considering the non binding nature
of the vote, the board of directors
could well disregard it and make

133
payments to directors (and
managers) in line with the
Remuneration Report rejected by
the general meeting, providing
justification to shareholders.
̈ This first model of Italian SOP, gave
often reasons to proxy advisor and
institutional investors to vote against
the remuneration policy
̈ Also in response to the 2008 global
financial crisis, EU regulator finally
decided to impose minimum
transparency requirements and SOP
rules for every Member State, by a
legally binding regulatory act, the
Shareholders’ Rights II Directive
(n.828/2017 – SRD II).
̈ In general terms, SRD II seeks to
reinforce effective and long-term
shareholders’ engagement and
monitoring of company
performance powers.
̈ Coming to the executive
remuneration issue, SRD II states that:

134
  - Despite the governance models
adopted, shareholders have the
right to express their views on
executive pay;
 - Separate votes on the
remuneration report (advisory)
and remuneration policy (binding
or advisory according to Member
States choices) are required.
FollowingtheSRDIItransposition,Art.123-
terhasbeenemendedtointroduce:
 – A binding vote on the first
section of the report
(remuneration report), in any case
at least every three years or at the
time of making amendments to the
policy;
 – An annual advisory vote on the
second section of the report
(compensation paid).
̈ Italian legislator therefore opted
for the “stronger” solution on
SOP foreseen by SRD II, despite
135
 the opting-out choice allowed by the
Directive. On 2020 AGMs there has
been the first application of new SOP
rules.
̈ Considering the binding nature of
the vote on the first section of the
report, companies shall only
allocate fees in compliance with
the remuneration policy most
recently approved by the
shareholders, with limited
possibility to temporally derogate
from the same, in the presence of
“exceptional circumstances”.
The SRD II Directive has been
transposed by almost all European
countries in line with the deadline of 10
June 2019, with the first application of
the new remuneration provisions from
2020. Consequently:
• Countries which already had
national legislation on SOP (e.g. UK,
Nederland, Germany, Italy, etc.): the
transposition of the Directive has had
limited impacts on the right of
136
shareholders to vote (mainly with
reference to the introduction of the
advisory vote also on the remuneration
report), but has nevertheless involved
an update of the national regulations to
the indications of the directive (e.g.
further specifications of the contents
and/or purposes of the Remuneration
Policy, new disclosure requirements);
ØCountries which did not have
national legislation on say on pay
(e.g. Austria, Croatia, Greece, Baltic
States, etc.): the transposition of the
Directive has had significant effects on
the system of transparency of directors'
remuneration and on the recognition of
shareholders' right to vote on
remuneration policy and the
remuneration report.
 SOP mechanism has been widely
adopted in response to the finding
lack of efficiency of traditional
governance tools, based on the role
boards and remuneration
committees, to neutralize the risks of
managerial opportunism and
137
 misalignment with related business
performance, in the definition
process of the remuneration of the
company's executives.
 ̈ As a consequence, this subject
has become a key issue in
economic literature debate on
governance matters, being
analyzed from different theoretical
perspectives (agency theory,
stewardship theory, institutional
theory and stakeholder theory)
̈ Many studies focused on main
antecedents and outcomes of SOP
mechanism on the listed companies
governance structure.
Internal antecedents are linked to
compensation structure and levels and
to firm characteristics:
– compensation characteristics:
investors’ dissent is positively correlated
with CEO remuneration levels, in cases
of excessive pay and expecially in cases
of misaligned compensation, increasing

138
sensitivity to “rewarding
underperformance”;
– firm performance and governance
characteristics: it has been also verified
that companies with better performance
indicators are more likely to receive
shareholders approval and that dissent
is negatively correlated with the equity
stake held by the largest shareholder
(consistently with better monitoring and
lower agency costs) and is negatively
correlated with the level of disclosure,
especially on the variable components
of CEO pay;
̈ External antecedents have been
analysed mainly with reference to proxy
advisors and media coverage, being
demonstrated a direct and relevant
influence of proxy advisor
recommendations on voting results.
There are not conclusive findings on
SOP effects; in general terms:
̈ Several studies confirm a positive
correlation between SOP, the reduction
in compensation levels and their
139
improved link to performance, even
though only relevant dissent level
has been founded to effectively
influence companies decisions and
actions.
 ̈ The ongoing monitoring
activity of institutional investors
and proxy advisors has certainly
lead companies to a greater
attention to policy design,
increasing their "sensitivity" to pay
alignment to performance and to the
correct representation to the market
of the rationale behind adopted
policies.
 ̈ Finally, SOP has promoted a
better knowledge and dialogue
between companies and their
shareholders, stimulating the
emergence of new forms of
activism by the last ones and
strengthening the role played in this
context by proxy advisors.
Does SOP mechanism contribute to
reduce/rebalance pay levels and
140
structure? There are different elements
to consider:
 - Shareholders’ real knowledge
and expertise ... (some authors
suggest that it would be better to
leave the floor to BoD and Remco,
that are more qualified to perform
the pay design process..)
 - Necessity to verify pay levels
with reference to...what? market
peers, companies’ performance,
internal benchmark... others?
- Trends in voting results show
high supports levels to compensation
programs despite the fact that
average compensation levels may
continue to rise ...
- Paradox effect: in companies with
overpaid CEOs and weak governance
structures and/or law levels of board
independence, high levels of SOP
support may act as a legitimation
mechanism that strengthen rent
extraction and agency coast.

141
Despite the controversial effect on pay
levels, empirical analisys can show the
impact of SOP mechanism on some
governance topics:
1. Independent Directors/Remco role
2. Issuers disclosure levels
3. Executive compensation linked to
long-term performance
4. Institutional Investors activism
̈ Remuneration Committee has played
a central role in SOP implementation,
supporting BoDs in remuneration policy
design and periodically monitoring its
concrete implementation.
̈ Their functions consequently evolved
from an “internal” consultative role
towards an “external” accountable
position.
̈ This evolution has been somehow
confirmed by data:
 - the relevance of independent
directors within the REMCO has

142
 increased from 35% in 2012, to
53,8% in 2019 (considering the
committees composed entirely by
independent directors);
 - in the same way the average
numbers of REMCO meetings has
increased from 5,2 in 2012 to 8 in
2019, showing a higher level of
involvement and activity in
“traditional” and “new” executive
compensation topics.

̈ Italian companies’ disclosure

standards have been constantly
increasing, since the first introduction of
SOP in Italy, in 2012.
̈ Remuneration reports, which in the
first phase provided merely
compliance information, have been
143
progressively transformed in an
effective communication tool.
̈ In 2019, disclosure levels on
performance results has quadrupled
if compared to 2012.
̈ Thanks to SOP implementation, since
its adoption in 2012, and following the
dialogue with minorities and institutional
investors, in 2019 executives
remuneration structure is characterized
by an increased relative weight of
the medium-to-long- term variable
components (50% vs 36%), and by an
ESGperformance measures improved
the presence of (73% vs 33%).
 ̈ The introduction of SOP rules
increased the influence of
institutional investors in
corporate governance practices
 ̈ The opportunity to express their
views on directors’ remuneration
policy (and pay) has – de facto –
implied a growing presence of
shareholders at the companies
AGMs, determining as well, the
144
 necessity of a more structured
dialogue with the issuers.
 In this context, SOP
implementation can be considered
also as a useful tool for analyzing
institutional investors activism
 For investors, the ability to vote on
items at a general meeting is a key
to exercising their ownership rights
and their activism has increased over
the last years.
 ̈ At the same time, they hold very
large and diversified portfolios,
and keeping track of agenda
proposals across a large number of
companies in different countries
(with diverse corporate governance
traditions and practices) is time
consuming and costly.
 ̈ Investors consequently make large
use of professional consultant, the
proxy advisor firms, for different
kind of services:

145
  – the first type of services consists of
analysing the proposals for
general meetings and providing
voting recommendations.
 – the second type of activity consists
of offering services with regard to
the whole voting logistic and
transmitting the voting
instructions to the issuer, e.g.
through a voting execution platform.
 ̈ In addition, depending on their
particular business activity, proxy
advisors can provide a range of other
analytical and consulting
services that are connected to the
voting process and to corporate
governance issues in general
(helping investors to overcome
difficulties linked to cross border
voting, local practices, language
barriers, general meetings
concentration in the same period of
the year)
 Proxy Advisor Firms

146
 § history of proxy advisers dates back
to the 1980s when ISS and PIRC were
founded.
 1990s,even more in the 2000s many
new proxy advisors entered the
market, both in US (Glass Lewis and
Egan Jones), in Europe Ivox
(Germany), Manifest and IVIS (UK),
Proxinvest (France), Shareholder
Support (the Netherlands), GES
Investment Services and Nordic
Investor Services (Sweden).
ISS is largest proxy advisory firm in US
/globally, based in Rockville, maintains
offices in 13 countries/ firm employs
approximately 1,000 individuals,
serves 1,700 institutional clients, and
provides proxy recommendations on
40,000 shareholder meetings in 117
countries. It is owned by Genstar, a
private equity firm.
Glass Lewis is 2nd largest proxy
advisory firm in U.S. /globally,
headquartered in San Francisco,
employs 1,200 people and provides
147
 voting recommendations on 20,000
shareholder meetings in 100
countries. It is jointly owned by two
Canadian pension funds: Ontario
Teachers’ Pension Plan and Alberta
Investment Management Corporation.
Pensions & Investment Research
Consultants Ltd (PIRC) is Europe’s
largest independent corporate
governance and shareholder advisory
consultancy / over 25 years
experience in providing proxy research
services to institutional investors on
governance and other ESG issues.
PIRC is independently-owned and
works for
 investors, believing that any
commercial relationship with the
companies it analyses would present
a fundamental conflict of interest.

Frontis Governance is first Italian proxy

advisory agency, born on September
2011 from a long-standing experience in
proxy business, part of the international
148
network ECGS("Expert Corporate
Governance Service") - a joint venture
of independent local market experts
which have come together to provide
specialist governance assessments and
informed proxy voting advice.
At European level regulation of proxy
advisor industry is based on self-
conduct principles: Principles for
Providers of Shareholder Voting
Research & Analysis
Principles were published by a group of
proxy advisors in March 2014 to
develop a code of conduct to improve
investors’ and issuers’ understanding of
what they can expect from proxy
advisors to avoid concerns regarding
the independence of proxy advisors
and the accuracy and reliability of
their advice.
Principles are based on understanding
that the ultimate responsibility to
monitor investments and make
voting decisions lies with investors.
Use of third-party services (such as
149
those provided by BPP Signatories),
does not shift this responsibility or
relieve investors from any fiduciary duty
owed to their clients.
̈ The European Securities and Markets
Authority (ESMA) published on 2015 its
Follow-up Report on the development
of the “Best Practice Principle”
 ̈
Overall,ESMAfindsthattheindustryism
ovingintherightdirectionbutseesroom
forimprovementin some areas.
 ̈ As a consequence the Principles
have been updated in 2019, within
the framework of a structured
Independent Review Process which
referred to Principles covers 3 main
areas (according to a “comply or
explain” rule):
1. Service quality:
methodologies and models
applied, source of information
etc.

150
 2. Conflicts-of-Interest
Avoidance or Management:
process in place to identify,
disclose and eliminate or
mitigate actual or potential
conflicts of interest or
business relationships that
may influence the preparation
of their research, advice and
voting recommendations
3. Communications Policy:
approach to communication
with issuers, shareholder
proponents, other
stakeholders, media and the
public.
 Proxy advisor voting
recommendations and general
policies have a significant
influence on investors behavior,
but, despite this evidence, it is quite
difficult to estimate its degree.
 § For their part, institutional
investors usually claim that they
refer to, but do not rely on, the
151
 voting recommendations of proxy
advisory firms.
Real influence of proxy advisor
firms?
 influence spreads over AGMs
outcome, plan design and
governance choices, with
reference to compensation
choices, considering that a
negative recommendation from
ISS on SOP proposals may lead to
25% reduction in voting support
(See Copland, Larcker, Tayan –
2018).

Institutional investors
Engagement
While in 1970 it was individual investors
that controlled around 70 percent of all
outstanding shares in the US,
Institutional ownership of companies
has grown to the point that institutions
today own approximately 80 percent of
the market value of U.S. stocks.
152
Also, much of what remains as
individual ownership today is in fact
ownership by founders and senior
management.
Institutional ownership has been
growing because individual investors
increasingly delegate their asset
management decisions to institutional
investors. They do so for a number of
reasons, including the diversification
benefits funds offer, access to specific
investment themes, as well as the
perceived stock selection expertise on
offer.
This change in ownership structure has
had profound consequences for the
corporate governance of firms.
By centralizing investment decision
making, institutional investors have
increased the ability of investors to
exercise direct forms of power over
corporations, because in asset manager
capitalism it is not the many ultimate
investors but their intermediaries that

153
typically engage with companies and
exercise the voting power.
What are we exploring when talking
about their activism?
Institutional Investors and their
engagement with the companies in
which they invest
1) Why do some institutional investors
operate at a distance from organizations
seemingly acting only to “exit” and
“trade” shares while others actively
engage through various means of
“voice”?
2) What processes and behavior are
associated with active ownership?
Our concept of shareholder activism is
defined as “actions taken by
shareholders with the explicit intention
of influencing corporations’ policies and
practices”
Defined in this way, active ownership
also contrasts with passive ownership:
 holding the shares

154
  collecting dividends (and perhaps
voting) • trading
What does it mean to “own” a
corporation?
1. Are owners only value-
maximizing agents?
2. Or there is a variety of
investors and shareholders that
behave differently?
Ownership has special resonance in
law, psychology, sociology and
organization studies, invoking
contesting conceptual framings.
Ownership as Rights
In legal scholarship on property,
ownership is discussed as consisting of
a bundle of rights.
According to Agency theory,
shareholder have residual control rights
over the company and this is explained
by their higher risk in case of distress
and residual dividend remuneration.

155
However, some scholar have argued
that the firm-specific investment of
employees (for instance) may be higher,
questioning the shareolder value
maximization theory and shareholder
power.
Ownership as Commitment
“The core of psychological ownership is
the feeling of possessiveness and of
being psychologically tied to an object».
The symbolic (subjective) level,
however, involves rather different
assumptions that the vision of
ownership as rights. The person invests
emotionally and identifies with the thing
“owned.”
Owner Versus Trader
For large, listed corporations,
shareholders change all the time, as
trading in equity markets occurs and
investors shift between different shares.
Trading-focused holders are often
perceived as having short-term

156
interests, more interested
in the size of capital gains possible by
churning investments than in the
fundamentals of the businesses in which
they invest.
Universal Ownership
This “trading” view presents a sharp
contrast to “universal ownership,” a
concept developed by two investment
managers, Monks and Minow (1995),
whose investment approach had a
larger
social and economic purposes in mind.
The concept of universal ownership
refers to the fact that the big asset
managers hold stakes in virtually every
company and thus a slice of the entire
Economy, thus raising the importance of
externalities (sistematic risk and not
anymore specific) This approach results
in a interest in long-term performance of
the economy for the benefit of society
as a whole.
Owner as Steward

157
agency theory posit an opposition
between agents and principals
stewardship theory states that
managers subordinate personal
interests to the good of the organization
and have intrinsic rather than just
extrinsic (financial) motivations.
This results in a need for cooperation
between owners and managers
according to which
agents shouldn’t be monitored but
trusted and supported with a long-term
orientation (mutual stewardship
behavior).
ALL THIS VIEWS SEEMS TO DRIVE
TO A BASIC DINSTINCTION AMONG
FINANCIALLY AND SOCIALLY
MOTIVATED ACTIVISM
However, there is a third possibility
which is given by the
SOCIALLY RESPONSIBLE INVESTING
Responsible investors take a long-term
view, drawing a link between financial
158
returns and socially and
environmentally beneficial outcomes.
Activism drivers
There are also some contextual e firm-
specific elements that drive activism:
1. 1) The higher is market liquidity
(including derivatives, market for
corporate control,
etc), the higher will be the incentive
for investors to exit instead of rising
their voice
2. 2) Funds managers are usually
rewarded according to the size and
the performance of the portfolio they
manage. The rewarding system will
also influence the level of activism.
3. 3) Institutional elements (such as
corporate governance laws and
companies’ codes) may influence the
attitude of shareholder to raise their
voice (biding vs advisory say on pay
we have seen in the previous lesson,
for example)

159
 4. 4) As ownership concentration
increases, the ability to exit stocks
becomes less feasible and voice
should become a preferred option
5. 5) Funds (investors’ guidelines
and tracking errors) and other
market peculiarities (transaction
costs)
From drivers to activism
According to Hirschman, investors have
a limited range of actions, often
interpreted as:
 Exit, through selling shares
 Loyalty, through holding shares,
 Voice, through shareholder activism
Activism can be both self-interested,
financially motivated and with short-
term objectives. Or
Involves interaction underpinned by
concerns and attitudes that privilege
the welfare and benefits beyond the

160
 self in favor of a wider group of
“others.”
Bootsma (2013) connects
stewardship behavior and voice by
distinguishing between “true” and
“Fake voice”. “Fake voice” is self-
interested, superficial
engagement,while true voice is
calculated behavior with some long-
term considerations.
Shareholder actions
Empirical analyses tend to focus on
voice that reaches public attention,
whether through:
 the voting records of institutional
investors
 shareholder resolutions proposed to
company annual meetings
 hostile actions taken by hedge funds
(that gain media attention)
By contrast, the exercise of
shareholder voice unfolds in a very
different manner, whereby voice is
161
 expressed through engagement
between shareholders and managers
over time.
The process can involve, even begin
with, mechanisms of shareholder
voice, such as voting and resolutions,
but it also involves private dialogue,
often over a considerable time.
Rather than the number of
engagements increasing, it is the
type of engagement that has
changed.
Management actions
Management behavior can be proactive
or reactive, resistant or receptive. If
receptive, the management response
may be symbolic or substantive.
Firms may decide not to listen, that is,
not to engage with shareholders, or
engage in an insincere, symbolic way
that does not allow a change in firm
direction and signals rejection to the
investor.

162
Corporate managers are more likely to
engage in dialogue with shareholder
activists when:
 the firm is larger and more
responsive to stakeholders,
 when the CEO is the board chair
(duality),
 and when the firm has a relatively
low number of institutional investors.
These elements are consistent with
the definition of stakeholder
salience: power, legitimacy and
urgency
Results
1. 1) Intitutional investors have
such large asset bases and such
dominant market positions when it
comes to the share of equity inflows
captured that the cost of
engagement is minimal when
compared to the profits they
generate

163
 2. 2) Better corporate governance
will lead to higher share prices (and
liquidity) which will lead to greater
inflows
3. 3) Fund management company
challenging excessive executive
remuneration (say on pay) is likely to
improve funds public image
4. 4) Finally, client demand (what
we called «multiple agency») is an
important driver of investors’
engagement activities. In a world in
which ownership concentration has
reduced the ability to sell the shares
of underperforming companies,
institutional investors increasingly
have no choice other than to become
active stewards of the companies
they invest in if they are to fulfill
their fiduciary duties towards their
clients
Governance Structure and Quality
Questions concerning governance
characteristics that may influence
Institutional investor choice
164
 1. Do institutional investors prefer
stocks of companies that have better
governance structure?
2. If so, does the institutional
investors’ preference toward better-
governed companies vary across
different types of institutions?
3. Does the relation between
corporate governance and
institutional ownership vary with the
firm’s information environment?
4. What kinds of corporate
governance provisions are most
attractive to institutional investors?
If we want to examine institutional
investors’ preference toward a certain
group of companies, we would need to
consider why institutional investors’
preference for those companies is likely
to be greater than that of individual
investors.
Preferences

165
We defined institutional ownership as
the fraction of a firm’s shares that are
held by institutional investors.
Institutional investors (e.g., banks,
insurance companies, and pension
funds) have strong fiduciary
responsibilities.
Hence, institutional investors’ fiduciary
responsibilities give them a strong
incentive to choose stocks of companies
with good governance structure (Avoid
expropriation and agency conflicts)
Bushee and Noe (2000) suggest that
institutional investors prefer firms with
better disclosure rankings to reduce
monitoring costs (better governance
structures require less outside
monitoring, institutional investors are
likely to prefer companies with better
governance mechanisms to those with
poor governance mechanisms).
Chung et al. (2010) argue that good
governance improves financial and
operational transparency and thus
reduces information asymmetry
166
between insiders and outside investors.
They find that firms with better
corporate governance exhibit higher
stock market liquidity and lower trading
costs.
Answers
1. The results show that institutional
ownership increases monotonically with
governance scores. The mean
institutional ownership of firms that
belong to the lowest governance- score
quintile is 42%, whereas the
corresponding figure is 71% for firms
that belong to the highest governance-
score quintile.
2. To determine whether the relation
between institutional ownership and
corporate governance varies across
different types of institutions,
researchers investigated 5 types of
institutions: i) bank trust departments;
ii) insurance companies; iii) investment
companies; iv) independent investment
advisors; and v) others (e.g., pension

167
funds, foundations, and university
endowments).
The results show that firms with higher
governance scores exhibit greater
institutional ownerships across all types
of institutions.
3. Corporate governance quality matters
less in institutional investors’ stock
selection decisions for firms with low
information asymmetry and/or high
external monitoring.
Answers
4. Some corporate governance elements
that matters
Ø Board
 The current minimum standard is
that at least 2/3 of the directors on
the board should
be independent
 Nominating committee of the board
should be composed solely of
independent

168
 directors.
 Compensation committee of the
board should be composed solely of
independent
directors.
 Directors should be elected by
shareholders on an annual basis.
 Boards should not have fewer than 6
members or more than 15 members.
 CEO should not serve on more than 2
other boards of public companies
(interlock).
 Former CEOs should not serve on the
board of directors
 The positions of chairman and CEO
should be separated (duality)
Ø Audit
• Audit committee should be composed
solely of independent directors
Ø Compensation

169
  All stock-based incentive plans
should be submitted to shareholders
for approval.
 No interlocking directors (this may
happend if companies do not
compete) should serve on the
Compensation Committee.
• Directors should receive a portion of
their compensation in the form of stock.
Innovation
Innovation assists companies to stay
competitive, to grow, to serve new
markets, among others, which helps to
generate wealth for investors.
Innovation is a potentially important
source of competitive advantage for
firms Innovation is a simultaneously
risky undertaking, in the sense that its
commercial
success is not guaranteed. Indeed, there
are more innovation failures than
successes.

170
How supportive are institutional
investors of firms' innovations?
Like firm managers, a high number of
fund managers are under pressure to
generate wealth for their sponsors, and,
therefore, these funds, in particular, are
less likely to hold the shares of
innovative firms that cannot profitably
exploit their innovations in the short
run.
Innovation is often a long-term process
with commercial exploitation and
financial success achievable only in the
long term or not at all.
Do these firms, therefore, suffer from a
lack of support from certain institutional
investors?
There are two contrasting hypotheses to
explain how institutional ownership
affects long- term, intangible
investments such as scientic research
and innovation.

171
1) Institutional investors chase short
term profits, with little concern for long-
term prospects.
Thus the presence of institutional
investors among shareholders can lead
managers to cut long-term investment.
Stock market pressures managers to
select projects that they can easily
communicate to investors; managers
forgot the exploration of new ideas in
favor of existing technologies, which are
more transparent to investors.
Moreover, institutional investors may
have preferences for certain corporate
governance mechanisms, for instance,
compensation structures with standard
pay-for-performance schemes that
punish failures with low rewards and
termination.
2) The second hypothesis is that
institutional investor monitoring
promotes long-term investments.
When the market cannot observe the
full spectrum of managerial actions,
172
moral hazard could induce managers to
prefer a quiet life.
Even worse, managers could divert
firms resources for their own private
benefit and retain less capital for
investments in innovation.
Institutional investors monitor and
discipline managers, ensuring that
managers choose investment levels to
maximize long-run value rather than to
meet short-term earnings goals.
(Mitigation of agency problem)
Nonetheless, it would be rash to assume
that all kinds of institutional investors
are under short-term pressure to avoid
the stocks of innovative firms.
One of the areas where innovation is
humming, for example, is among start-
up firms, and the role of major
institutional investors in providing seed
funding (which cannot be easily
divested) is well documented despite
the high failure rate among start-ups.
(difference between income stock and
growth stock)
173
Some institutional investors spend a
great deal of time and effort in
identifying the next big idea that is
worth pursuing, and it is through this
process of diligence that they expect to
create more wealth for their financial
sponsors and investors.
In so doing, there is a high likelihood
that these institutional investors would
support firms that pursue innovations
that could potentially be an enormous
hit both commercially and financially. It
becomes therefore imperative to
differentiate among the types of
institutional investors in the study of
innovation.
Results
 The findings suggest volatility in
institutional shareholdings is
inversely related to the investee
firm’s number of patent. Supporting
the hypothesis that stability (i.e.,
lower volatility) in institutional
shareholdings assist firms to
innovate.
174
  The higher the proportion of shares
held by institutional investors, the
higher the number of patent.
 Firms are more inclined to cut R&D
expenses in response to a decrease
in earnings when a large proportion
of institutional owners have a short-
term focus.
 An increase in ownership by
institutional investors (including
short-horizon investors) is associated
with an increase in R&D
expendituresand innovation outputs,
arguing that monitoring institutions
are mitigating managers' career
concerns.
 Higher institutional ownership is
associated with a decrease in
scientific research activities, as
measured by scientific publications
(difference between research and
development efforts – applied
research vs basic research)
 Results
• The positive effect of institutional
175
 ownership on innovation is driven by
foreign
 institutional investors
 Foreign institutional investors not
only share common characteristics of
financial institutions but also possess
unique features that are different
from those of domestic institutional
investors.
 Specifically, foreign institutions are
credited with their independence
from local management, with holding
internationally diversified portfolios
and with expertise in monitoring
firms.
 Therefore, they are more likely to
insulate managers from punishment
for innovation failures (tolerance for
failure by foreign institutions would
encourage firm innovation).
 Foreign institutions could facilitate
knowledge spillovers through
business networks (promote cross-
border mergers and acquisitions)
176
  CSR
 CSR/ESG is taking importance day by
day.
 Research that examines stocks with
positive ESG ratings as well as stocks
with weaknesses often focuses on a
specific aspect, such as “green”
stocks or firms in the tobacco
industry. Most of these studies show
positive abnormal returns in these
narrowly focused categories.
 Examples are the following:
 ••••
 Environmentally clean firms
Firms that disclose green
investments
Firms with high employee
satisfaction
Firms displaying good corporate
governance
 Do institutional investors care about
overall CSR performance? Or are

177
 their investment decisions focused
on specific CSR attributes?
Reason for Institutional Investor to go
for ESG:
 First, individual investors seem to
have a strong demand for CSR. This
has resulted in significant growth in
the number of SRI funds and their
assets under management.
 Second, fund managers may have a
multi-attribute utility function that
incorporates social values
 Third, individual investors seem to
be more loyal to SRI funds
 Compensation policies are taking in
consideration ESG elements
 With the springing up of the CSR
movement, institutional investors are
gradually aware of its importance to
firms’ reputation, competitive
advantage, success and profits
 Firms who lack engaging in positive
social activities or who become the
178
 target of social concerns may face
legal, economic, or social sanctions
from their stakeholders and society
in general
Results:
 Firms with high Env/Soc weaknesses
have greater risks of highly negative
events, like incident or sanctions.
 Firms exhibiting Env/Soc weaknesses
are more likely to experience the
extreme negative events of filing for
bankruptcy or being delisted from
the stock exchange for performance
reasons.
Thus, avoiding firms with ES
weaknesses may simply be a
ramification of risk management
 Significant positive relationship
between the performance and
number of institutions that hold
stocks of a corporation, but the
relationship between social
performance and the percentage of
shares ownership are insignificant
179
  Recent research (2020) reveles that
higher level of institutional
ownership leads to better CSR
ratings and reduces certain negative
CSR issues that might lead to
lawsuits and penalties from
regulators
Results:
 Investment horizons do matter and
long-term institutional investment is
positively related to corporate social
performance, whereas short-term
institutional investment has negative
relationship with corporate social
performance.
 Institutional ownership can have a
positive impact on the CSR-firm
value relation by mitigating concerns
about overinvestment and agency
problems through promoting the
optimal allocation of firm resources
and monitoring managerial actions.
 Monitoring incentives by long- and
short-term institutional investors
suggests that firms with longer
180
 horizon shareholders have a greater
incentive to pursue CSR activities
that are positively affiliated with
long-term firm value.
 CSR reporting (disclosure) helps
market participants make more
informed investment decisions,
reducing information asymmetries
and providing material info to
estimate the investments' risk and
long-term performance
 Different Institutional Investor may
foster and be interested in different
sub-pillars of ESG
 Financial and Operating performance
 Premise
 A considerable body of research has
focused on the role of institutional
investors as corporate monitors.
 The rationale is that due to the high
cost of monitoring, only large
shareholders such as institutional
investors can achieve sufficient

181
 benefits to have an incentive to
monitor
 Moreover, Institutional investor have
the ability to monitor
Does it lead to superior corporate
performance?
 The previous literature notes mixed
results.
 Cornett, Marcus, Saunders, and
Tehranian (2007) investigate the
effects of institutional ownership on
corporate operating performance in
the US from 1993 to 2000 and find
that only pressure-insensitive
institutional investors (e.g., mutual
funds) have a positive impact on firm
performance.
 Ferreira and Matos (2008) provide
international evidence regarding the
role of institutional ownership in 27
countries over the 2000–2005 period
and suggest that foreign and
independent (insensitive) institutions
improve firm value and operating
performance (as measured by ROA
182
 and net profit margin), whereas the
applicable coefficients for domestic
and non-independent (sensitive)
institutions are either insignificant or
negative.
 Elyasiani and Jia (2010) investigate a
large sample of 1532 US firms over
the 1992– 2004 period and find a
positive relationship between firm
performance and the stability of
institutional ownership. These
authors also suggest that
institutional investors owning 5% or
more of shares have a greater
positive impact on firm performance
(as measured by industry adjusted
ROA). In addition, these authors find
that the channels of such influence
include decreased information
asymmetry and increased incentive-
based compensation.
 Yuan, Xiao, and Zou (2008) find that
fund stock ownership has a positive
effect on firm performance in a
sample of 1211 firms between 2001
and 2005.
183
  Chen, Du, Li, and Ouyang (2013)
note that institutional ownership
(both foreign and domestic)
increases return volatility in a
sample of 1458 Chinese firms for the
1998– 2008 period. Examining
Chinese listed firms from 2003 to
2008
 Chan, Ding, and Hou (2014) indicate
that better external governance
through sources such as funds could
improve financial reporting quality
and, in turn, strengthen investors'
confidence and enhance financial
market liquidity.
 Using data from 102 local Chinese
banks between 2006 and 2011, Wu,
Shen, and Lu (2015) demonstrate
that having more foreign strategic
investors (FSIs) enhances the
earnings smoothing (stability) of
local banks (which is an industry
rarely explored).
 Empirical results indicate that stable
institutional ownership is associated
184
 with a lower cost of debt; the more
stable the institutional ownership,
the lower the yield spread and the
better the credit rating of the
[Link] stability effect on the
cost of debt is stronger for active and
larger institutional investors, and for
firms with more severe information
asymmetry and agency problems of
debt.
 Impacts on IPO firm performance are
different, with Business Angels
having a significant value-enhancing
effect.
Venture Capital and Business Angels
both focus on the pre-IPO firm,
seeking to add value to that firm.
However, post-IPO, the VC focus
shifts to those investors in their
funds, while the BA focus remains on
the firm (Funds have an exit way
with the IPO, thus capitalizing an
illiquid asset, unless they have a
buyback option, giving to the stock a
certification effect)

185
  Finally, Institutional ownership is
positively associated with managerial
efficiency, suggesting a causal effect
of institutional ownership on
managerial efficiency (ability with
which managers convert corporate
resources into revenues).
 CORPORATE GOVERNANCE AND
INNOVATION
 Innovation has become a crucial
element for the creation and
improvement of competitive
advantage in the long term.
 At the level of firms and industries,
many types of changes can be
considered, for example, those that
affect their methods of work, their
use of factors of production, their
outputs to improve productivity and
performance, etc.... These multiple
changes have raised different
categories and types of innovation;
such as innovation of products,
processes and organizations;
technological or nontechnological
186
 changes; radical or incremental
innovations, etc. (OECD, 1997)
 The first academic conceptualization
of innovation emerged with
Schumpeter (1934), who defined
innovation as a wide phenomenon
that involved any new way of doing
things in the economic field. From
this concept, innovation could be
understood as any change,
modification, improvement or
creation, independently on its object
(product, process, structure, method,
etc.) as far as it has been
implemented or applied in the
market. Thus, innovation involves a
process with different stages, where
the new ideas must be first created,
proved, put into production, and
finally, placed on the market, to
affect individuals, companies and the
whole society.
 MEASURES:
 R&D as a necessary condition to
innovate, since R&D enhances the
187
 capacity of firms to innovate, is
frequently recognized as one of the
most relevant inputs for innovation,
and is a starting point for its analysis.
 R&D activities have been frequently
used as an innovation indicator; for
example, R&D expenses or R&D
intensity are used to measure the
efforts made by companies to
innovate, the number of registered
patents, obtained as a result of R&D
activities, serves as measure or
innovation outcomes.
 THEORY
 Regarding the theoretical
perspectives used to explain the
effects of corporate governance, the
agency theory is the one that stands
out.
Amongst its assumptions, this theory
reveals the opportunist behavior of
individuals concerned only with
looking out for their own interests.
The divergence of interests affects
the firm performance and is
188
 especially evident in respect to
certain business strategies that
involve significant risks, as in the
case of innovation.
agency theory explains relationship
between corporate governance and
innovation
Another relevant theory on this topic
is stewardship theory:managers’ and
owners’ interests are aligned, so,
managers ensure an improvement in
the company’s situation, considering
that this situation is one that can
ultimately benefit everyone.
 A review of the literature
demonstrates frequent cases in
which a contingent approach is
adopted and, depending on the
situation, assumptions from one
theory or another are applied. Other
theoretical perspectives are the
transaction costs theory, the
prospect theory, the institutional
theory, the upper echelon theory,
and the resource-based theory.
189
  Literature on corporate governance
offers some useful ideas for the
comprehension of innovation in
companies, recognizing that
businesses differ in the structure and
organization of their governance
bodies, and that these differences
may explain partially, amongst other
factors, innovations adopted by
them.

Ownership Structure
Ownership structure emerge as the
most relevant element related to the
190
link between corporate governance and
innovation.
Equity financing and structyre is
important since Debt financing can
discourage innovative activities because
of the high specificity and intangibility of
technological investments, the high risk
of these activities and the existing
information asymmetries.
In fact, ownership concentration and the
existence of large shareholders or
“blockholders” is a significant feature of
corporate governance in some regions,
and the study of its influence on
innovation has been seen as a priority.
Some studies have demonstrated a
positive relationship between a
concentrated shareholding and
innovation, for example, in respect to
R&D investments (Lee, 2012). According
to this author, the long-term orientation
effect dominates over the risk-
averseness effect of ownership
concentration.

191
In other cases, the relationship has been
proven negative (Brunninge et al., 2007;
Di Vito et al., 2010; Zeng and Lin, 2011).
Some arguments supporting this
negative relationship has to do with the
greater risks supported by shareholders
due to the lack of diversification of their
portfolio.
There are also many studies that fail to
demonstrate if ownership concentration
has significant effects on innovation.
And some authors have put forward a
curvilinear relationship, in the form of
an inverted ‘U’, whereby, when
ownership in the hands of major
shareholders grows, its effect on
innovation might be positive to start
with, but then becomes negative from a
certain level.
The vast majority of studies attempt to
explain the lack of consensus in the
effects of ownership concentration on
innovation by analyzing different types
of blockholders, given that their profile

192
determines their interests and,
therefore, what their influence will be.
Although most of these studies have
analyzed the direct influence of
ownership concentration on innovation,
there are some authors interested in
analyzing the moderating effect that
large shareholders can exert. Some
authors demonstrate that various
significant owners can moderate the
relationship between lack of financial
resources and R&D investment (we will
go back to this when addressing
innovation in family firms).
To understand the relationship between
innovation and ownership structure, it is
crucial to keep in mind the properties of
innovation.
First, new technologies are
informationally opaque: they are hard to
understand for third parties and few
interim signals, such as cash flows, are
available on their final outcome.
Second, innovations entail large up–
front effort and start–up costs. Third,
193
innovations require a long gestation
period.
Fourth, innovations are risky.
When a firm innovates, it can make
mistakes. And innovations are risky also
because they have low salvage value:
the assets are often intangible (e.g.,
intellectual property) or specific to the
firm. These properties (informational
opaqueness, start–up costs, long– term
horizon, riskiness) are relevant for the
impact of ownership structure on
agency conflicts in innovative firms.
Ownership concentration can mitigate
conflicts between shareholders and
managers in widely held firms, such as
the U.S. public companies.
Consider the case in which managers
are “lazy”or have career concerns.
These problems are severe for
innovations because they entail large
effort and start–up costs.
Moreover, innovations are risky for a
CEO: if things go wrong for purely
stochastic reasons, the board of
194
directors may think he is a bad manager
and fire him.
This makes managers averse to
innovation. In these circumstances, a
large shareholder can monitor
managers, forcing them to choose
innovation optimally.
Another problem for innovations is that
shareholders tend to undervalue long–
term innovative investments and this
makes it easy for hostile acquirers to
buy shares of the company at low
prices. To protect shareholders,
managers will underinvest in
innovations.
Large shareholders’ long–termism can
reduce the pressure on managers for
myopic behavior, promoting
innovations.
The U.S.–based literature focuses on the
above benefits of large shareholders in
mitigating conflicts between managers
and shareholders. However, a broad
body of literature argues that large
shareholders can become entrenched
195
and represent their own interests at the
expense of minority shareholders.
Expropriation of minority shareholders
can be easier for informationally opaque
new technologies and, hence, minority
shareholders can be hostile to
innovations.
STATE OWNERSHIP
Even the best-intentioned and most
strongly motivated directors and
managers of state-
run programs tend to lack the ability to
play an ownership role.
Ownership itself is an economic, as well
as legal, function that can be exercised
with
greater or lesser ability.
Ownership involves taking ultimate
responsibility, or exercising residual
decision-making
authority, over resources deployed in
productive uses.

196
The ownership function is distinct from
management, leadership, and similar
functions.
Those can be exercised on behalf of
others, while ownership per se—the
right to make decisions about the use of
resources under conditions not specified
by prior agreement (Hart, 1995)—
cannot be delegated to non-owners.
Competence arguments for value
creation are different from incentive
arguments because even owners with
strong incentives to increase value may
lack the competence to do so.
STATE OWNERSHIP
The idea that government actors often
lack ownership ability appears in
popular discussions of the failures of
“state capitalism” but is almost entirely
absent from the academic literature
(Musacchio & Lazzarini, 2014).
Ownership competence differs
systematically between public and
private actors, particularly around
197
innovation, and that this difference has
important implications for innovation
policy.
Government ownership is conducive to
an inefficient market for corporate
control for two main reasons.
One is that the pursuit of political goals
leads to horizontal agency costs, that is,
conflicts between principals (private
owners VS government owners) who
have different interests, preferences,
and objectives. For instance,
government owners may push for the
appointment of controllable managers
who are not the most economically
competent but who are politically
aligned with the government agenda.
Another reason is that government
owners are less capable than private
owners of selecting competent
managers.
STATE OWNERSHIP
Besides the conventional rationales for
government ownership, such as national
198
security, natural monopoly, and so on,
public investment has also more
recently been justified as a means of
providing stable, long-term ownership to
firms.
Because government has access to the
deep pockets of taxpayers, it is less
likely than private owners to be
constrained by short-term cash
requirements and it can take large
stakes, held for long periods.
This size and stability can, in principle,
support the monitoring of managers and
lead to effective corporate governance.
Moreover, political owners may have
key information about future policies,
which can reduce the uncertainty faced
by firms.
In technology industries, government
ownership can also be used to control
technological development and as a
form of regulation, pushing firms to
adopt technologies and business models
that serve the state’s objectives instead
of the firm’s.
199
STATE OWNERSHIP
The overall evidence suggests that
government ownership is associated
with low
governance quality.
In sum, despite some theoretical
arguments suggesting advantages of
government ownership, the evidence
suggests that making government a
shareholder, especially when it takes an
active role, is not conducive to improved
firm governance and performance.
For this reason, any purported national
or social advantage deriving from
government ownership must consider
the expected harm to firm performance,
including investments in value-creating
technological and organizational
innovations.
SMEs
Approximately 95% of firms around the
world are categorized as micro, small
and

200
mediumsized enterprises.
Moreover, SMEs are not only essential
for economic growth and job creation
but also the
engine of innovation.
Innovation is essential for the success
and competitive advantage of SMEs.
The introduction of innovative products,
services or processes facilitates firm
growth via the creation of new demand
and exerts significant repercussions on
SMEs performance.
Therefore, it is essential to understand
potential factors that help to foster
innovative activities in SMEs.
In addition, survival SMEs will grow up
temporarily (either via IPO, M&A or
changing their legal status), leading to
significant changes in their ownership
structure. Therefore, it is important for
practitioners and scholars to
comprehend the effect of ownership
structure on corporate innovation.

201
SMEs
Literature offers conflicting perspectives
on whether ownership concentration is
beneficial or detrimental for innovation.
On the one hand, higher ownership
concentration may be favorable for
innovative activities under the view of
agency theory. Specifically,
concentrated ownership is a key
corporate governance mechanism that
alleviates agency problems originated
from the separation of ownership and
control, ultimately promoting firm
performance. According to agency
theory, agency costs arise when there
are conflicts of interest between firm
owners and managers. While owners are
interested in maximizing long-term
value and profitability, firm managers’
interests may include improving
personal wealth, job security, or other
short-term goals.
Innovative activities, with the nature of
high risk-high return strategy, are
preferred by firm owners who focus on
202
future value. In contrast, it is reluctant
for managers to invest in innovation
(e.g., R&D projects) which has higher
failure rates, do not produce immediate
outcome, and may threaten
employment status of top positions.
SMEs
Second, firms with concentrated
ownership may suffer from financing
constraints because they rely
extensively on large shareholder’s
wealth or have to generate cash flow
internally to fund promising projects.
Beck et al. (2006) also suggest that
young firms report higher financing
obstacles. In contrast, older firms are
more creditworthy and reputed than
younger entrepreneurs. Older SMEs also
have public track records that can be
assessed by potential lenders (Cole and
Dietrich 2019).
SMEs

203
On the other hand, ownership
concentration may be harmful to firm
innovation for several reasons.
First, large owners can exacerbate
rather than alleviate agency problems.
Specifically, block holders may influence
managers to pursue private benefits,
creating
conflicts of interest between them and
smaller shareholders (Shleifer and
Vishny 1997).
The possible threat of intervention from
large owners may reduce managerial
initiative or manager’s incentive to
explore potential projects, ultimately
making investment activities in general
and R&D activities in particular
inefficient. In addition, large
shareholders may also appoint
representatives, such as friends or
family members, who are unqualified.
This type of expropriation is detrimental
to innovation since manager
characteristics are significantly

204
associated with innovative activities (Lin
et al. 2011).
Second, firms with concentrated
ownership may suffer from financing
constraints because they rely
extensively on large shareholder’s
wealth or have to generate cash flow
internally to fund promising projects.
Board attributes and innovation
Besides ownership structure, research
also highlighted the effect that the
board of directors has on innovation.
These studies basically analyze the
structure and composition of the board,
which is determined by variables, such
as:
- the proportion of directors of different
types (executive and independent)
- the existence of duality
- demographic characteristics

205
- diversity of board members (age,
gender, operational or functional
experience, educational background)
Studies consider these board member
characteristics in isolation, although an
ever- increasing number of authors
consider interrelationships between
different bodies with decision-making
powers within a company.
Among the variables related to the
board of directors, the literature has
given particular attention to those
related to structure
As Petrovic indicates (2008, p. 1375)
“there are serious doubts about whether
it is better that the board is dominated
by external members not close to the
company or by non- independent
directors with valuable inside
knowledge.”
Thus, a board dominated by internal
directors may be less efficient in
supervising managers, which could
translate into a lower level of innovation

206
in the case of a management averse to
risk.
On the other hand, internal board
members have valuable operational
knowledge of the companies whose
management they are involved in,
which helps to strengthen the strategic
function of the board, given that they
can understand the internal workings of
the company and the challenges it faces
better than independent directors
(Nicholson and Kiel, 2007).
These arguments indicate that it is not
clear whether innovation would improve
with a majority of internal or external
directors.
An important theme is also to analyze
not only the direct effect of board’s
structure on innovation, but also the
functions or roles of different directors
and their efficiency, and take a better
look into the processes inside the board
that can explain its effects (Jaskyte,
2012).

207
As for duality, the literature yields no
conclusive results either.
In the presence of duality, the board
finds itself in a weak position in relation
to the CEO.
This can complicate the introduction of
new ideas, which foster innovation
(Zahra et al., 2000).
The centralization of corporate powers
and decision-making is generally
detrimental to innovation and risk taking
as it takes power away from the board
and increases managerial discretion
(Chen and Hsu, 2009; Dalton et al.,
1998; Zahra et al., 2000).
Nevertheless, other authors consider
that duality favors the elimination of
ambiguity in respect to leadership and
enhances the legitimacy of a strong
leader, avoiding any confusion as to
where the power within the company
lies (Dalton et al., 1998; Sanders and
Carpenter, 1998).

208
Some research has partially considered
some interrelationships between
ownership structure and the board.
It is the case, for example, of the studies
that prove that the effects of ownership
structure on innovation are affected by
characteristics of the board (Brunninge
et al., 2007, Chen and Hsu, 2009), or
that the effects of the board on
innovation are affected by ownership
structure (Hernández et al., 2010;
2014).
Also, some evidence has been found
about the interrelationship of different
blockholders, such as institutional
ownership and family ownership (Chang
et al., 2010; Gomez-Mejia et al., 2014);
and the interrelationship between some
board’s characteristics, such as
directors’ social capital features and
their policy of compensation (Chen,
2014; Chen et al., 2013; Deutsch, 2007).
On the other hand, taking a “look
outside the box” of corporate
governance, and to analyze the possible
209
effects of contingent and contextual
variables.
For example, it would be relevant to
consider characteristics of the company,
like: - the company’s age or size
-specific industry or economic sector to
which the company belongs interacts in
the effects exerted by their bodies of
governance on innovation (Kang et al.,
2007), as well as the characteristics of
the environment, like its turbulence
(Coles et al., 2008), and the
relationships of the company with
competitors, suppliers and other kind of
stakeholders (Kotlar et al., 2014).
All these variables can act as
antecedents and as moderator variables
affecting the relationship between
corporate governance and innovation.
Diversity on boards has been receiving a
growing attention for several years, as
one of the most significant issue
currently in corporate governance (Kang
et al., 2007; Mahadeo et al., 2012, Bear
et al., 2010).
210
Corporate governance research has
shown that the analysis of composition
of boards would need to pay more
attention to board roles, and board
members' background and
characteristics, beyond the traditional
monitoring and control role (Ruigrok et
al., 2007).
Beyond its role of ensuring the
alignment of interests between
shareholders and managers, dominated
by agency theory and focusing on the
monitoring and controlling role of
boards (Daily et al., 2003), research
brought evidence that another crucial
role of the board of directors is to
provide resources to the firm, strategic
advice, knowledge, resources and
networking for the company (Hillman et
al., 2000; Huse, 2007; Pfeffer, 1972;
Mizruchi, 1996; Burt 1992).
In this perspective, many studies
investigated the role of board
heterogeneity and diversity on firm
performance, as well as on firm
strategy.
211
Beyond the effect on firm performance,
which received mixed evidence (Carter
et al., 2003; Siciliano 1996; De Andres
et al., 2005; Carter et al., 2010),
diversity on board has also been
associated with positive cognitive
effects such as creativity, innovation,
new ideas and insights (Goodstein et al.,
1994; Ruigrok et al., 2007; Kang et al.,
2007; Deutsch, 2005; Miller and Triana,
2009).
Following previous research (Millikens
and Martin, 1996; Erhardt et al., 2003;
Kang, 2007), board diversity can be
defined as variety on the composition of
the Board of Directors, which can be
categorised in directly observable
aspects (e.g. gender, age, nationality ...)
and less visible ones (educational,
previous work experience, ,
competencies ...).
According to many studies (Murray,
1989 ; Carter et al., 2003 ; Siciliano,
1996 ; Erhardt et al., 2003) this diversity
provides the firm with several
advantages such as greater creativity,
212
better understanding of the market,
effective problem solving and enhanced
capability.
Thus, board diversity provides a
competitive advantage to the firm, and
long term benefits.
Resource dependence theorists have
argued that the integration of diverse
stakeholders into the board helps the
organisation to acquire critical resources
(Goodstein et al., 1994 ; Pfeffer, 1972 ;
Pfeffer and Salancik, 1978).
The promotion of diverse perspectives
can produce a wider range of solutions
and criteria for strategic decisions, and
reduce narrow-mindedness in board
proposals (Kang, 2007 ; Kosnik, 1990 :
Eisenhardt and Bourgeois, 1988).
As Huse (2007) recalls, there are also
some downsides to diversity: diversity
on boards may generate some
coordination and communication
difficulties, and diverse boards may
need more time for discussion, and may
lack some cohesion.
213
Potential conflicts and
misunderstandings may prevent the
board from efficient decision making
(Goodstein et al., 1994).
As suggested by Miller and Triana
(2009), the positive outcomes of board
diversity help to relate board diversity
to innovation.
Board diversity provides the firm with
human and social capital resources that
help the board to generate ideas,
allocate resources and find
opportunities, thereby increasing
innovation.
Some research investigated the link
between governance and innovation
strategies, focusing notably on the
relationship between board
demographic characteristics and firm
innovation (Torchia et al., 2011).
Several studies have linked board
diversity to innovation, as heterogeneity
on boards can lead to broader range of
ideas, greater creativity, thus higher
level and quality of innovation.
214
The heterogeneity of the top
management team in terms of
demographic characteristics such as
age, nationality, gender, racial diversity,
promotes innovation and influences the
ideas and types of innovation in the firm
(Hambrick and Mason, 1984; Torchia et
al., 2011; Olson et al., 2006; Østergaard
et al., 2011; Talke et al., 2010; Carter et
al., 2010).
In their study of the relationship
between board diversity and firm
performance, Miller and Triana (2009)
suggest that innovation takes a
mediating role, and they found a
positive relationship between gender
diversity and innovation.
Torchia et al. (2011) found a positive
link between gender diversity and firm
organizational innovation, thus focusing
on one specific pattern of diversity
(gender) and one specific form of
innovation (organizational innovation).
Among numerous definitions of
innovation and multiple concepts,
215
different types of innovation: Product,
Process, Organizational and Marketing
innovations.
This distinction is very useful in order to
study the complexity of innovation
strategy (OECD, 2005; Mairesse and
Mohnen, 2005; Ballot et al., 2012).
Innovation strategy cannot be restricted
to product innovation.
An innovation strategy has to take into
account multiple dimensions of the
innovation process including R&D,
cooperation, market studies,
identification of customer needs,
production process, organization of
work, workers involvement and
commercialization of the innovation.
Boards need to pay attention to the
various forms of innovation: research in
innovation shows that introducing
different types of innovation (product,
process, organisational, marketing) can
provide greater performance (Mairesse
and Mohnen, 2005; Mohnen and Roller,
2005; Laursen and Foss, 2003).
216
When considering the effects of
diversity in board composition, several
kinds of diversity must be taken into
account (Huse, 2007): do some kinds of
diversity have a more significant impact
than other kinds of diversity?
Gender diversity on board and
innovation
Women on boards bring specific
perspectives, experiences and working
styles in comparison with their male
counterparts, they bring different
knowledge and expertise (Daily and
Dalton, 2003; Hillman et al., 2002; Huse,
2007).
This broader range of ideas and
perspectives helps to identify new
innovative opportunities (Miller and
Triana, 2009). We can thus expect that
the presence of women on boards may
contribute positively to firm innovation
(Torchia et al., 2011).
According to Kang et al. (2007), women
on boards may have a better
understanding of consumer behaviour,
217
the customer needs , and opportunities
for companies in meeting those needs.
Previous research points out that
women have an intimate knowledge of
consumer markets and customers. We
can then expect that gender diversity on
boards would influence innovation, in
particular marketing innovation.
Other researchers argue that
organizational innovation is more
appropriate to focus on, when dealing
with the contribution of female directors
to firm innovation, as this form of
innovation may be more "people-
oriented" and influenced by specific
individual characteristics (Torchia et al.,
2011).
This suggests that gender diversity
influences positively firm organizational
innovation.
Age diversity on board and innovation
Traditionally, most members of
corporate boards are mature,
experienced, and by default

218
senior directors (Kang et al., 2007).
This can be explained by the inherent
nature of company management and
career evolution, which results in
considering retired executives or
executives which had a significant work
experience in other companies in the
same industry as ideal non- executive
board members (Gilpatrick, 2000).
Still, age diversity on boards helps the
company to benefit from the different
perspectives of different age groups,
and the value of having the
perspectives of younger directors on
boards is emerging as an aspect of
diversity worthy of attention (Walt and
Ingley, 2003).
Age diversity on boards encourages
board development and learning, which
may foster creative and innovative
ideas.
Mahadeo et al. (2012) found a
significant positive relationship between
age diversity on board and firm's
corporate performance.
219
They suggest that with age diversity, a
board can consider the various strategic
and operational aspects in a more
effective way.
Kang et al. (2007) argue that diversity in
age of directors helps the board to bring
different perspectives, and for example
to target firm's customers in different
age groups with a variety of products
and services.
Then, the best way to represent the
interest of customers, and increase the
customer- board interaction (Huse and
Rindova, 2001), would be to have
directors from different age groups.
We can thus expect that age diversity
on board have a positive effect on
product innovation and market
innovation.
Kang et al. (2007) found that companies
in the consumer services and products
industry are more likely to appoint
directors in a more diverse age range.

220
They conclude that in order to deal with
a wide range of customers' needs and
interests, boards have an advantage
when their directors reflects this age
range.
An age-diverse board needs a division of
labour at board level: the older group
provides experience, network, financial
resources, the middle-aged group is in
charge of the main executive
responsibilities, and a younger group
develops its knowledge of the business
(Mahadeo et al., 2012).
Therefore this wider range on business
may generate conflicts between
generations, and make age differences
more visible and difficult to coexist.
There is an expectation that most
directors are mainly former managers
from various companies who are now in
the position to sit on other corporations
and enjoy their retirement (Kang, 2007),
whereas younger people have the
energy and the drive to succeed, and
plan ahead for the future (Ibid., p. 196).
221
As recalled by Huse (2007), this might
reveal what the author calls the
'downsides' of diversity: difficulties for
maintaining cohesion, for coordination,
for building a common understanding.
These potential generational conflicts or
misunderstandings between different
interests or expectations might be
especially dangerous for organizational
change.
The greater diversity in interests and
expectations, the greater potential for
conflicts and diverging definitions of
organizational goals and policies
(Goodstein et al., 1994).
Corporate culture is “a system of shared
values and norms that define
appropriate attitudes and behaviors for
organizational members” (O’Reilly and
Chatman (1996).
More gender diverse boards are
associated with a corporate culture that
promotes innovation.

222
Management theory also argues that
more diverse boards including more
gender diverse boards could positively
affect corporate innovation practices
through their promotion of a more
diverse labor force (Dezsö and Ross
(2012)).
More diverse inventor teams bring
different knowledge and perspectives to
problem solving (Page, 2007). The
presence of team members with
different backgrounds can inspire
inventor teams to explore novel
solutions in uncertain situations that
lead to more radical or disruptive
innovation. A large number of studies
show that more diverse teams, including
more gender and ethnically diverse
teams at the research and development
level, are more creative than more
homogenous teams
Research in psychology and economics,
largely based on laboratory evidence,
has consistently found that women are
less overconfident than men whether
overconfidence is measured as
223
excessive precision of beliefs or as over-
estimation of the likelihood of success
(Croson and Gneezy (2009)).
This is consistent with studies that
examine investment decisions by day
traders (Barber and Odean (2001)),
corporate financial and investment
policies by executives (Huang and
Kisgen (2013)), and M&A decisions by
corporate boards (Levi, Li, and Zhang
(2014)).
Surveys in both psychology and
economics (Schwartz and Rubel (2005),
and Adams and Funk (2012)) indicate
that women relative to men tend to
score lower on measures of personal
values related to success and
achievement (e.g., power, stimulation,
and self- direction) and higher on
personal values related to community
(e.g., benevolence and universalism).
Similarly, experimental and survey
evidence in psychology indicates that
women, on average, are more patient
and less impulsive than men when
224
trading off present versus future values
(Silverman (2003), and McLeish and
Oxoby (2007
Although these personal value
differences have not been applied to
predict corporate decision-making, they
imply that female directors might avoid
the overinvestment that comes from an
over-emphasis on achievement while
still pursuing innovative projects for
their long-term benefits.
In industrialized economies, many
companies are not owner-led, but
manager-led which causes the well-
known principal–agent problem. The
principal–agent problem arises from
divergence of interests of the manager
and the owner in combination with
information asymmetries (Berle and
Means 1932; Jensen and Meckling
1976). As a manager (agent) cannot be
completely monitored by an owner
(principal), he is expected to lead the
company less efficient than does an
owner, because he maximizes his own

225
utility and not necessarily the firm’s
one.
In contrast, a firm managed by a 100%
owner is led efficiently, because the
100% owner is the residual claimant and
will thus maximize overall firm profits. It
is likely that differences in leadership
also affect a firm’s investment into
innovation.
Indeed, theory identified two opposing
incentives that influence a manager’s
decision to invest into R&D and cause a
divergence of interests between the
manager and the owner when it comes
to investments into innovation.
Holmström (1989) developed a
theoretical model based on the agency
theory, where he finds that leadership
structure affects R&D investments as
agency costs associated with innovation
– i.e. an investment into risky and long-
term projects – are high.
Even though innovation projects might
lead to potentially high rewards, he
argues that
226
managers under-invest into innovation
compared with owners due to the risk
associated with those projects.
Innovation projects face a high risk of
failure which can have detrimental
effects on a manager’s career and
eventually lead to job loss (see also
Zwiebel 1995).
Besides, a risk-averse manager has the
incentive to reallocate resources to less
risky projects, in order to reduce the
volatility of his flexible wage component
that depends on company profits
(Holmström 1989).
In order to align incentives of manager
with those of the owner, literature on
corporate governance suggests among
several instruments to let the manager
participate in the equity of the company
(Jensen and Meckling 1976; Murphy
1999).
Increasing managerial ownership shares
entail an incentive effect, that is, the
manager behaves more like an owner.

227
It is likely that at different levels of
managerial ownership, the potential for
entrenchment will influence managers’
attitudes towards investments into
innovation heterogeneously.
Indeed, Manso (2011) developed a
theoretical framework in which he
analyzes optimal incentive schemes to
motivate innovation.
He finds that the optimal incentive
scheme that motivates executives to
innovate rewards longterm success and
has a high tolerance for early failure.
Manso concludes that managerial
ownership should motivate innovation,
In contrast to this risk argument acts
the growth argument which states that
managers have an incentive to over-
invest into R&D compared with owners.
A manager’s wage is positively
correlated with company size (Murphy
1985; Baker, Jensen, and Murphy 1988).

228
As innovation fosters growth (e.g.
Abramowitz 1989; Aghion and Howitt
1997, 2009), higher R&D investments
might positively affect a manager’s
remuneration.
Besides, managers profit from non-
pecuniary benefits of investments into
innovation such as status, power,
prestige, and that innovation is
positively valued in public.
Thus, two opposing incentives affect a
manager’s decision to invest into R&D
compared with an owner and the net-
effect of both remains unclear, i.e.
which incentive outweighs the other.
CEO and innovation
Information processing is the key
activity in the search and development
of technological
innovation (Keller, 1994; Leiponen and
Helfat, 2010; Love et al., 2014).
Upper echelons theory (Hambrick and
Mason, 1984) suggests that CEOs filter
information through selective
229
perceptions, interpret the filtered
information and make strategic choices
based on their construed realities (Cho
and Hambrick, 2006).
Therefore, the input and processing of
information by CEOs profoundly impact
all aspects of innovation activities and
outcomes.
When CEOs scan environments to input
information, their perceptions of
environmental conditions directly
change their decisions regarding
technological innovation (Lefebvre et
al., 1997).
Subsequently, when CEOs process
information, cognitive biases reinforce
their selective attention.
For example, CEOs that have a technical
background retain more technology-
related information, and it causes them
to emphasize R&D more (Barker and
Mueller, 2002; Daellenbach et al., 1999;
Datta and Guthrie, 1994).

230
Therefore, CEOs’ bias in information
processing may affect their firms’
balancing between exploitative and
exploratory innovation.
Exploitative innovation and exploratory
innovation differ in terms of payoff
horizon and outcome uncertainty.
Exploitative innovation is incremental,
for example, adding new features to
existing products. The outcome of
exploitative innovation is less uncertain,
and it can generate a more predictable
revenue stream in the short term.
Conversely, exploratory innovation is
radical, for example, introducing
radically new products to the market.
Exploratory innovation requires long-
term investment in R&D, and the
payoffs are less predictable. For
example, a radically new product or
technology may be either a blockbuster
success or a catastrophic failure.
Therefore, the risk preference of CEOs
may influence their emphasis on either

231
exploitative innovation or exploratory
innovation.
Risk preference of CEOs influences their
decision making in various domains,
including technology decisions
(Hoskisson et al., 2017).
Technological innovation is an
inherently risky activity since it requires
substantial resources, but the outcome
is often highly unpredictable (García-
Granero et al., 2015).
Therefore, CEOs’ risk taking directly
determines their firms’ innovation input,
processes and outcomes (Prasad and
Junni, 2017).
For example, risk-averse CEOs focus
less on R&D and innovation (Musteen et
al., 2010; Papadakis and Bourantas,
1998), yet risk-seeking CEOs invest
more in R&D (Barker and Mueller, 2002;
Wu and Tu, 2007), pursue highly
uncertain new technologies (Li and
Tang, 2010) and achieve higher
innovation performance (Tang et al.,
2015). Thus, managerial risk taking is an
232
important additional mechanism
through which CEOs influence
technological innovation.
CEO tenure and exploitative/exploratory
innovation
As CEOs’ job tenure advances, they
focus more on internal sources of
information, and
they are less flexible in exploring new
technologies, and they avoid excessive
risk taking. Therefore, CEOs may
emphasize exploitative innovation more
as their tenures increase.
As CEOs’ job tenure in their firms
progresses, they tend to rely more on
internal sources for information inputs,
as a result of habituation, the
establishment of informational routines,
the cultivation of trusted sources and
the tendency for those sources to cater
to executives’ information preferences
(Finkelstein et al., 2009).
For example, McDonald and Westphal
(2003) found that longer tenure CEOs
tend to seek less advice from top
233
managers at other companies and stick
to their own counsel.
Therefore, long-tenured CEOs are
expected to have an internal bias where
they focus more on internal
organizational activities and resources,
and they seek less information from the
external environment (Luo et al., 2014).
Due to their internal information sources
bias, CEOs tend to focus more on local
search to exploit existing technologies
rather than conducting a distant search
to explore novel technologies.
hus, over the course of a CEO’s tenure,
we are likely to observe that a firm
would produce less explorative
innovation and more exploitative
innovation as a firm evolves through
these different stages of the technology
life cycle.
Risk preferences of CEOs also vary as
their tenure advances in an organization
(Tang et al., 2016).
Hambrick and Fukutomi’s (1991) model
of CEO tenure suggests that longer
234
tenure of CEOs may lead to increased
risk aversion.
Newly appointed CEOs are under
pressure from shareholders to enact
changes in strategic trajectories (Weng
and Lin, 2014). In order to demonstrate
their capability and gain
acknowledgment from shareholders,
they tend to initiate bold and visible
new strategies and activities (Miller and
Shamsie, 2001).
Furthermore, CEOs in their early
seasons also have a long-term
perspective, and they are more likely to
make long-term investments that have
a longer payoff horizon. As CEOs gain
longer tenure, they become risk averse
and more short-term orientated
(Henderson et al., 2006).
Moreover, long-serving CEOs have a
great psychological and tangible
investment in the firm; they have
obtained firm-specific human capital
that may be lost due to failures in

235
excessive risk taking (McClelland et al.,
2012).
Therefore, risk aversion leads long-
serving CEOs to resist high-risk activities
that can bring potentially higher returns
and favor low-risk activities that can
bring lower yet less uncertain returns
(Olson et al., 2018).
Exploitative innovations are developed
through a linear and more predictable
process, and they are often in the form
of incremental improvements (Vagnani,
2015). Thus, exploitative innovation
would become a preferred type of
innovation for longer-serving CEOs.
CEOs may also develop innovative path
dependencies as their tenures progress
(Thrane et al., 2010).
Based on the cognitive model of
technology evolution (Kaplan and
Tripsas, 2008),
managerial cognition is an important
mechanism of a firm’s technology life
cycle and change.
236
A new CEO is appointed often because a
firm experiences difficulty in continuous
innovation and the new CEO is expected
to bring radical technological changes.
Therefore, in the early stage of their
tenure, CEOs may be more open to
exploring new and radical technological
opportunities. In this “era of ferment”
(Kaplan and Tripsas, 2008), a firm
experiments with various technical
trajectories and possibilities.
After searching broadly for various
technological trajectories, then comes
the stage of “convergence on a
dominant design” where members of
firm converge on a dominant design and
collective technological frame.
Once a dominant design is achieved,
firms then enter the “era of incremental
change” in which firms develop
subsequent innovations with
incremental improvements rather than
radical changes.
Thus, over the course of a CEO’s tenure,
we are likely to observe that a firm
237
would produce less explorative
innovation and more exploitative
innovation as a firm evolves through
these different stages of the technology
life cycle.
Family Business
Agency theory perspective and
counterarguments
The characteristics of family firms may
influence their decisions on innovation
strategies.
Family owners and managers have
strong incentives to act in the long-term
interests of the firm.
This state of affairs makes it more likely
that they will support innovation as a
source of growth and wealth and as a
survival mechanism to protect their
competitiveness over time.
Agency theory indicates that
concentrating ownership and control in
the same hands (as in family firms)
reduces agency costs and aligns

238
managers’ and shareholders’ interests
( Jensen and Meckling 1976).
This alignment of incentives will
encourage managers to take risk
decisions aimed at boosting the value of
the firm, such as innovation-related
decisions.
Counterarguments to this point of view
do exist, however.
First, some scholars question whether
equity ownership lessens aversion to
risk (Matta and
McGuire 2008).
And second, family involvement could
generate agency costs (Schulze et al.
2001).
Theoretical reasons— some particularly
relevant to family firms—exist for
doubting the potential positive relation
between equity ownership concentration
and risk taking (McConaughy, Matthews,
and Fialko 2001).
Career opportunities, family fortune,
and reputation in the community are all
239
linked to the fate of the business in
family firms. Likewise, family members’
wealth depends primarily on the firm’s
value, as their patrimony is tied up in
the business.
Because the strategic decisions of
family firms have consequences for the
family’s personal wealth, both financial
and socioemotional (Gómez-Mejía et al.
2007), these organizations tend to be
more conservative.
This situation leads family firms to shy
away from decisions that increase
performance variability and bring
related risk, such as decisions on
innovation strategies.
In fact, Latham and Braun (2009) find
that higher levels of managerial
ownership decelerate R&D spending.
Similarly, alignment of incentives that
simultaneously reduces agency costs
and motivates efficiency may result in
careful resource conservation and
allocation relative to other governance
modes—what Carney (2005) labels
parsimony.
240
These factors, then, are likely to push
family firms toward safer practices
(Wright et al. 2002). In summary, the
risk aversion of family firms has an
impact on their strategies, as it can limit
corporate innovation and growth (Le
Breton-Miller and Miller 2009).
Family involvement may also result in
higher agency costs because of
problems related to self- control and
altruism (Schulze et al. 2001). These
problems make it difficult for family
firms to recruit, reward, and monitor
their managers effectively (Lubatkin et
al. 2005), which results in a shortage of
qualified managerial talent.
Indeed, parental altruism may favor
nepotism (Sirmon and Hitt 2003), thus
making the hiring of family members
more common while also increasing the
difficulty of monitoring their
performance (Dyer 2006).
Moreover, these problems of self-control
hamper the recruitment and promotion
of nonfamily managers (Gedajlovic,
241
Lubatkin, and Schulze 2004), individuals
who are so important for the
incorporation of new creative knowledge
and intangible skills to promote and
manage innovation activities (Chen and
Hsu 2009).
These difficulties of self-control and
altruism, therefore, may have a
negative effect on the quality of family
firms’ managers, the same managers
who are charged with deciding on
innovation processes.
In addition to the arguments related to
risk aversion and agency costs that
result in managerial restrictions, we
should not lose sight of the capital
constraints that limit the possibility of
initiating costly innovation projects.
For fear of losing decision-making
control, family firms are little inclined to
access capital markets or to allow the
entry of other investors (Kets de Vries
1993). This limits their financial
resources and with it the opportunities
to finance innovation activities.
242
Furthermore, the financing of R&D runs
into two types of difficulties that
translate into high financial costs (Hall
2002).
First, a problem of asymmetric
information exists, as debt holders do
not know the real value of the
technology they are trying to develop.
And second, these investments create
intangible assets that cannot serve as
collateral.
In short, although family firms have
some characteristics that could favor
innovation, there are other elements
(risk aversion, agency costs, and
resource constraints) for arguing that
family firms have less incentive and
means to perform innovation efforts
than do nonfamily firms.
A focus on the founder
Founders are often considered the main
architects of a new organization and
have a significant impact on the

243
operations and performance of a startup
(Wasserman, 2003, 2012).
For example, Jayaraman et al. (2000)
found that the existence of a founder
manager has a positive relationship with
stock performance among smaller and
younger firms.
However, various studies investigating
founders as managers which draw on
the perspectives of the corporate life
cycle and founder replacement have
generally suggested that, as a venture
grows into a large public firm, the
founder should be replaced with a
professional manager because founders
lack the administrative and managerial
skills to manage a large organization.
While these studies provided good
insights on the advantages professional
CEOs offer, they largely neglected the
cost side of replacing founder CEOs.
Based on studies of entrepreneurship,
founder CEO replacement may have
significant negative ramifications for
firms’ innovation performance.
244
Because founder CEOs have stronger
risktaking tendencies than professional
CEOs, founder-CEO-managed firms will
generate more innovations than
professional-CEO- managed firms.
Founder-CEO-managed firms are more
likely to generate explorative
innovations (i.e., innovations in
unfamiliar technological domains) than
professional-CEO-managed firms.
At the inventor level, there are also
indirect effect of founder CEOs’ risk-
taking tendency on innovation
performance on employee inventors.
Employee inventors who experienced a
change in leadership from a founder
CEO to a professional CEO are more
likely to leave the firm than those who
experienced a leadership transition from
a professional CEO to another
professional CEO.
Inventors who left a firm after a founder
CEO's sudden death may take more
risks in innovation activities than the
inventors who stayed at the firm.
245
Entrepreneurial firms, which are often
managed by founder CEOs, are more
likely to pursue innovation than
established firms, which are often
managed by professional CEOs, because
of differences, not only in the economic
situations of firms, but also in the
behavioral characteristics of CEOs.....but
this changes a lot with the family
involvement
Innovation Sourcing in Family Firms
Apart from deciding on the extent of
innovation efforts, family firms must
determine where to perform these
activities.
Firms can either opt to stay in-house or
look to tap knowledge sources external
to the firm through outsourcing or
technological collaboration (Bessant and
Rush 1995; Veugelers and Cassiman
1999).
Organizing innovation activities in-house
brings with it the advantages of limiting
leakage of information and intellectual
property to other firms, while also
246
reducing coordination difficulties
(Sampson 2004).
In this way firms are able to maintain
greater control over innovation
activities.
Notwithstanding these advantages, in-
house innovation entails nontrivial costs
that are inherent to the norms and
rigidities of the internal bureaucracy
(Holmstrom 1989), which ultimately
require a greater commitment of
resources.
Because innovation occurs primarily
through new combinations of resources,
ideas, and technologies, however, a
fertile innovation environment requires
a constant inflow of knowledge from
other places (Fey and Birkinshaw 2005).
An alternative strategy, then, is to turn
to external innovation activities.
These activities lead to time gains and
lower innovation costs, because
economies of scale in

247
some activities (e.g., R&D) can be more
efficiently exploited.
In contrast to in-house activities,
external activities reduce bureaucratic
costs, though they may create
considerable transaction costs derived
from moral hazard problems, including
free riding and leakage of valuable
knowledge.
How, then, are these considerations
likely to affect innovation-sourcing
decisions in the specific context of
family firms?
External innovation sourcing by family
firms poses at least two problems.
First, such market transactions are
difficult to organize and can lead to
major relational problems (Pisano 1990),
thereby hampering the acquisition of
technological capabilities from external
organizations (Mowery, Oxley, and
Silverman 1998). Family firms are more
prone to maintaining control over
business activities because of their risk
aversion and the concentration of family
248
wealth in the firm. In-house activities
and external sourcing allow clearly
different levels of control, with family
firms likely to prefer the greater control
over activities offered by the first
option, even when this requires them to
commit more resources. In line with this,
empirical research reveals that family
firms prefer internal transactions over
other forms of transactions that are
closer to the market (Abdellatif,
Ammann, and Jaussaud 2010).
A second argument relates to the
assimilation of external knowledge.
Assimilating technological knowledge
from outside the firm requires
“learning” or “absorptive”
capacity, and this largely depends on
firms’ R&D spending (Cohen and
Levinthal 1989, 1990).
Indeed, authors recognize that R&D
investment has a dual role: on the one
hand it makes it possible to generate
new knowledge, whereas on the other
hand it enhances the firm’s ability to
249
identify, assimilate, and exploit existing
information.
If family firms are less given to investing
in R&D, they will find it more difficult to
assimilate external knowledge and
consequently will have fewer incentives
to turn to external sources of
knowledge.
Technological collaboration is a widely
used external source that is recognized
as having a positive impact on
innovation performance (Hoang and
Rothaermel 2005; Miotti and Sachwald
2003; among several others).
In addition to providing access to
external technologies (while allowing
firms to share costs and risks and
exploit synergies from
complementarities between partners),
technological cooperation may be less
vulnerable to transaction costs than
contracting options (Veugelers and
Cassiman 1999).
One drawback of these alliances,
however, may be that information
250
asymmetries and the uncertain and tacit
nature of innovation activities can
jeopardize the cooperative benefits.
In addition, collaborating with a third
party requires firms to share
information. Specifically, technological
collaborations are driven by
organizational routines and normative
frameworks that demand the sharing of
knowledge and capabilities.
In this context, partners need to be kept
informed and investment decisions must
be justified in accordance with the
agreed criteria.
Although family firms are usually seen
as possessing advantages to develop
social capital with firm stakeholders
(Llach and Nordqvist 2010; Sirmon and
Hitt 2003), research also indicates that
they prefer to establish social and
personal family networks rather than
formal economic networks (Basly 2007;
Graves and Thomas 2008).
Technological collaboration requires the
sharing of core knowledge along with
251
vital information related to the
innovation process.
In this context, it is important to note
that family firms guard their
independence jealously (Basly 2007)
and are reluctant to give confidential
information to potential partners.
In addition, family managers have
greater latitude to allocate resources
according to their personal criteria
(Carney 2005).
The freedom to invest on an intuitive
basis can be advantageous in some
contexts characterized by product and
organizational innovation, but a partner
in a technological alliance may find this
an inappropriate way of conducting
business.
Moreover, the desire of family firms to
maintain control may limit their
associations with other stakeholders (Le
Breton-Miller and Miller 2009).
Beyond this, partners in an alliance
must have absorptive capacity for
252
technological collaboration to be
successful, and as we have already
noted, this may not be an area of
strength in family firms.
This evidence would seem to make
family firms unlikely candidates for
technological alliances.
Innovation Results in Family Firms
Although family firms are likely to
perform fewer innovation efforts than
nonfamily firms, this does not mean that
they do not innovate.
Indeed, their competitiveness and long-
term survival continue to depend on
innovation.
The question to answer is what type of
innovations best match the differential
characteristics of
these firms.
Conventionally, innovations have often
been classified as incremental or radical
—depending on

253
their degree of novelty (Anderson and
Tushman 1990; Song and Montoya-
Weiss 1998).
Although incremental innovation
reinforces the capabilities of established
organizations, radical innovation is likely
to require the setting of a different
trajectory, forcing organizations to draw
on
new technical and commercial skills and
to adopt novel problem-solving
approaches (Tushman and Anderson
1986).
Incremental and radical innovations
bring different levels of risk and
therefore require different
organizational and managerial
capabilities. Incremental innovations are
derived from exploiting current
capabilities and seeking continuous
improvements that generate positive
and consistent returns (March 1991).
Firms face relatively few difficulties
when pursuing incremental innovations
(Bessant et al. 2010), because they take
254
decisions along an established
trajectory or within an established
technological paradigm (Dosi 1982).
These are, then, innovations with lower
levels of risk compared with radical
innovations.
Radical innovations are derived from
exploring new capabilities in search of
greater variation and novelty (March
1991). Firms that introduce radical
innovations need to substantially
change their ways of operating by
entering unknown markets and/or
introducing new products based on
technologies that are new to them. This
type of innovation can result in
competence destroying for firms
(Menguc and Auh 2010).
Alternatively, it can lead to the
cannibalization of current products and
even changes in the rules of competition
(Hurmelinna-Laukkanen, Sainio, and
Jauhiainen 2008). Radical innovation,
then, represents a high-risk and high-
return strategy (Bessant, Birkinshaw,

255
and Delbridge 2004), as Sorescu and
Spanjol (2008) empirically show.
Family firms are conservative (Sharma,
Chrisman, and Chua 1997) and are often
slow to change. Radical innovation could
render obsolete certain processes and
capabilities in a firm, destroying
the value of old capital and creating
new wealth through innovation (Morck
and Yeung 2003). Family managers are
by nature unwilling to launch the firm
into unknown markets or radically
change their client relationships.
The intense concentration of family
firms on their clients and current
markets can hinder the development of
new segments and prevent the
introduction of more novel innovations.
Moreover, family managers could be
reluctant to support radical changes
such as moves into new activities
because they may see them as threats
to their power bases in the firm.

256
In line with this, Anderson and Reeb
(2003) and Gómez-Mejía, Makri, and
Larraza (2010) find that family firms
diversify less than nonfamily firms, and
thus are implicitly less likely to
introduce new products in new markets.
Another factor to bear in mind is the
long tenure of family managers (Miller,
Le Breton-Miller, and Scholnick 2008).
These managers are also involved in the
firm from an early stage, which has an
impact on the culture and innovative
character of the firm (Kellermanns et al.
2008). Long tenures provide
managers with experience and deep—
largely tacit— knowledge of their
businesses, clients, markets, and
technologies. And this knowledge in turn
can help them to continually introduce
incremental improvements to their
products and production processes.
In addition, family managers maintain
close relationships with clients (Arrègle
et al. 2007), relationships that enable
family firms to identify and satisfy their
257
clients’ needs better and better (Cooper,
Upton, and Seaman 2005).
The dedication and proximity of these
managers to their clients, then, can
compensate for their lower levels of
professional and technical qualifications.
In summary, family firms are likely to
achieve incremental innovations
because (1) lower risk is associated with
this type of innovation, (2) their
managers have a deep knowledge of
their markets, and (3) they look to take
full advantage of their current client,
market, and technology knowledge.
DEGREE OF FAMILY INVOLVEMENT AND
SOCIOEMOTIONAL WEALTH
Distinguishing the organizational
processes of family-owned and non-
family firms rests upon an assessment
of the degree of family members’
involvement in the business (Chrisman
et al. 2012).
Following the work of Zahra (2003;
2005), and Patel and Cooper (2014), we
258
define family involvement as the active
participation of family members in
organizational decision-making through
voting rights (managerial and ownership
involvement).
Family involvement enhances the
family’s knowledge of the firm’s
challenges, strengths, and resources
(Sirmon and Hitt 2003; Zahra 2003), and
about trending business opportunities,
technologies, and markets (Zahra 2005;
Zahra, Hayton, and Salvato 2004).
This leads to a broader set of strategic
alternatives from which family firms can
choose (Zahra 2005), which, in turn,
determines the level of active influence
a family can take on the business.
Although influential shareholders and
board members rarely carry out
innovation processes or market
research themselves, their work in
monitoring internal processes and
distributing resources to achieve
strategic goals is vital to innovation

259
(Haynes and Hillman 2010; Hillman and
Dalziel 2003).
Family firm members with control of a
firm’s voting rights can decide on the
design of processes, the selection of
strategies, and the redeployment of
resources to different business units
(Chrisman et al. 2012; Sirmon and Hitt
2003; Zahra 2003).
Family involvement constitutes an
important dimension of socioemotional
wealth, which is a concept that has
gained traction over the last two
decades in family firm research (Gomez-
Mejia et al. 2007; Gomez-Mejia et al.
2011).
Socioemotional wealth has become the
key concept for explaining how and why
family firms differ in their goals and
behaviors from non-family firms.
It is defined as the “non-financial
aspects of the firm that meet the
family’s affective needs” (Gomez-Mejia
et al. 2007, 106).

260
It thus goes beyond the maximization of
profits. Berrone, Cruz, and Gomez-Mejia
(2012) suggest a set of five dimensions
for socioemotional wealth that include
family involvement, identification of
family members with the firm, binding
social ties, emotional attachment of
family members, and renewal of family
bonds to the firm through dynastic
succession.
Along these five dimensions,
socioemotional wealth strongly
influences the behavior of family
shareholders and board members
(Gomez-Mejia et al. 2007) and their
attitude towards innovation in particular
(Gomez-Mejia et al. 2011; Sirmon and
Hitt 2003).
For instance, the need to maintain
control of the firm, and thus to conserve
socioemotional wealth, might conflict
with the unpredictability and
uncontrollability of R&D efforts that are
necessary to create inventions that lead
to innovations (GomezMejia et al. 2011;
Gomez-Mejia et al. 2014).
261
Innovations, however, are often an
essential part of family firms’ strategy to
stay competitive and maintain their
socioemotional wealth in the long-term
(Rondi, De Massis, and Kotlar 2018).
Hence, socioemotional wealth
considerations are the key feature that
affects how family firms approach
innovation (De Massis, Di Minin, and
Frattini 2015; Zahra 2005).
Empirical evidence suggests that while
family firms invest less, on average than
non-family firms in R&D to develop
technological inventions, they show
higher variance in these investments.
They attribute this phenomenon to the
short- or long-term nature of R&D
investments.
In the short term, the investments may
threaten the socioemotional wealth of
the family, as they are often complex,
forcing the family to turn to outside
expertise; they require a willingness to
experiment, and they may involve
financing that entails ceding some of
262
the ownership to outsiders such as
venture capitalists (Gomez-Mejia et al.
2011).
In the long term, however, the same
investments can lead to superior
innovations that satisfy customers,
create sustained competitive
advantages, and promise
socioemotional wealth in the form of
long-term succession and strong family
identification with leadership in
innovation (Filser et al. 2018; Miller et
al. 2015).
Given their distinct nature,
socioemotional wealth has different
implications for inventions and
innovations.
Strong socioemotional wealth decreases
the number of inventions – which carry
a high risk of technological and financial
failure – but that it enhances the market
success of innovations.
This should be especially true if the
family is closely involved in the
managerial decision-making of the firm.
263
All needs of the family, their values, and
their expertise will directly influence the
allocation of resources to R&D and
innovation projects (Anderson and Reeb
2003; Carney 2005).
While family firms tend to be less willing
than non-family firms to engage in R&D
projects, they often exceed them at
pursuing and completing complex
innovation projects, due to the family
members’ skills.
These skills are rooted in their deep
knowledge of the market, and of the
firm with its idiosyncratic internal
affairs; in their tight monitoring of, and
control over, the innovation processes;
and in the passion that comes with their
socioemotional wealth.
There is a tension between being able to
engage in R&D and being unwilling to
do so. Scholars of family firm innovation
call this the “willingness-ability
paradox”. Once the family members
overcome their skepticism, they can
achieve better innovation outcomes.
264
This paradox finds its realization in
fewer inventions but more relevant
innovations
Family Involvement and Number of
Inventions
A stronger involvement of family
members in the decision-making
processes will lead to fewer inventions.
There are four main lines of
argumentation supporting this view.
First, while inventions are often the
cornerstones of innovations that
succeed on the market (Artz et al.
2010), investing and engaging in R&D to
develop them carries a high likelihood of
technological and financial failure (Kor
2006), as well as uncertainty about the
success of the invention.
An ex-ante evaluation of an invention’s
added value to the innovation process is
difficult to make before implementing it
in a product or service (Block 2012).
R&D investments sometimes lead to
nothing of any value at all. Such
265
financial and technological failures
threaten a family firm’s socioemotional
wealth (Berrone, Cruz, and Gomez-Mejia
2012; Sirmon and Hitt 2003).
Consequently, strong family
involvement will lead to protective
behavior to safeguard socioemotional
wealth, such as refusing to engage in
too many R&D initiatives at one time,
and, instead, focusing on a few projects
that have the best prospects.
Second, as part of their socioemotional
wealth considerations, family members
seek to maintain control and influence
over their firm (Berrone, Cruz, and
Gomez-Mejia 2012; Chua, Chrisman,
and Sharma 1999).
Since R&D projects are complex and
often involve collaboration and the
sourcing of knowledge from external
partners (GomezAccepted Mejia, Makri,
and Kintana 2010; Keil et al. 2008;
Kotlar et al. 2013), they also frequently
mean giving away some of the control
over the firms’ internal processes.
266
The higher the number of R&D projects
and the more distal the knowledge
involved, the higher will be the
managerial complexity (Belderbos et al.
2010), and the lower the possibility to
maintain tight control over the firm (De
Massis et al. 2015; Gomez-Mejia et al.
2011).
To contain this loss of control, family
members will use their voting power to
limit engagement in multiple R&D
projects leading to a low number of
inventions.
Third, family members often strongly
identify with their firm (Gomez-Mejia et
al. 2007; Gomez- Mejia et al. 2011).
They regard the firm to some degree as
an extension of the family, and they
care very much about its reputation
(Berrone, Cruz, and GomezMejia 2012).
If a firm loses face through financial and
technological failures, the shareholding
family’s socioemotional wealth is
diminished and the affected family
members will suffer emotionally
267
(Berrone, Cruz, and Gomez-Mejia 2012;
De Massis et al. 2015).
These considerations can negatively
affect how the family approaches
inventions (Filser et al. 2018), leading to
fewer R&D investments (De Massis et al.
2015) and engendering excessive
monitoring of processes (Miller et al.
2015), resulting in fewer and slower
R&D projects, and ultimately fewer
inventions, especially if the level of
family involvement in managerial
decision- making is high (Zellweger et
al. 2013).
Finally, strong emotional attachment of
the family to the firm leads to objections
against external technological
knowledge, which affects the number of
inventions that a firm develops.
Family owners have been portrayed as
excessively sentimental (Miller et al.
2009), sticking to the concepts,
employees, products, and traditions that
made them big (Fuetsch and Suess-
Reyes
268
2017), even if this conservatism is likely
to harm their economic performance
(Mazzelli, Kotlar, and De Massis 2018).
Sentimentality reduces the total number
of inventions, as family members
involved in firm strategy will be less
willing to support a strategic focus on
R&D efforts that require a “departure
from
existing organizational routines” to
create patentable inventions (De Massis,
Di Minin, and Frattini 2015, 12).
Family Involvement and Market
Relevance of Innovations
The market relevance of innovations
refers to customers’ perception of
additional benefits provided by firm
innovations relative to the previous
product generation (Chandy and Tellis
2000).
Thus, it constitutes an external user
perspective on the novelty and quality
of innovation activities.

269
Distinguishing between the number of
inventions and the market relevance of
innovations is of particular interest in
the context of family firms, as many
scholars underscore that family firms
invest less in R&D (Block 2012; Block et
al. 2013; Tognazzo, Destro, and Gubitta
2013) and thus create fewer inventions,
while others argue that family
businesses often create innovations with
higher market potential (Duran et al.
2016).
Inventions, as noted above, are not only
the output of R&D activities but also
essential inputs for the creation of
innovations relevant to the market.
While, as mentioned in previous slides,
we expect a negative relationship
between family involvement and the
number of inventions, we argue that the
strong involvement of family members
leads to greater market relevance of
their product innovations.
Several arguments support this claim.

270
First, family members who are involved
in firm decisions commonly spend their
whole careers working in the firm and
its industry, so they are often
extraordinarily knowledgeable about the
business and the market it operates in
(Cabrera-Suárez, De SaáPérez, and
García-Almeida 2001; Lumpkin and
Brigham 2011), as well as its customers’
characteristics and needs (Calabrò et al.
2018; Cuevas-Rodríguez, Cabello-
Medina, and Carmona-Lavado 2014;
Dibrell and Moeller 2011).
This knowledge makes these family
members particularly effective at
making decisions on resource allocation
and deployment within the firm and
industry (Sirmon and Hitt 2003).
While family members’ involvement
may choose lower resource allocations
into R&D, as they fear financial and
technological failures that could harm
their socioemotional wealth (Rondi, De
Massis, and Kotlar 2018), their
capabilities, expertise, and high level of
involvement in the processes make
271
them especially efficient in transforming
resources and inventions into
innovations that are perceived as
beneficial and are therefore successful
on the market (Duran et al. 2016).
Second, many family members who
have stakes in a firm seek to ensure a
longterm horizon in their R&D
investments and to avoid myopia in
their managerial decisions, as they want
to secure their socioemotional wealth in
the long run (Duran et al. 2016; Rondi,
De Massis, and Kotlar 2018).
This desire for long-term continuity
provides R&D managers in firms with
high family involvement with the time
and resources to carefully complete
complex innovation projects with long
payoff periods (Miller et al. 2015; Sirmon
and Hitt 2003).
Family members provide those carrying
out the projects with the necessary
knowledge on the usefulness of the
technologies involved (Duran et al.
2016).
272
Family members can also estimate the
technologies’ market potential based on
their market expertise and customer
knowledge, and use this information to
create Accepted Article This article is
protected by copyright. All rights
reserved innovations with a better fit-to-
market, meaning that customers will
perceive these innovations as beneficial.
Finally, family members typically show
high levels of identification with the
family business, as the firm represents
an extension of the family, with its
reputation an important source of self-
worth (Zellweger, Eddleston, and
Kellermanns 2010).
While this identification in combination
with innovation might trigger fear of
destroying the firms’ reputation (Block
et al. 2013) and risk for families’
socioemotional wealth (Filser et al.
2018), we expect that the positive
image of being an innovative leader can
become an essential part of the firm’s
identity, supporting identification and
dynastic succession over time.
273
Firms that consistently assign new and
younger family members to the board
will be able to stay innovative across
generations, (Zahra 2005), always
seeking new ways to satisfy customers
(Rondi, De Massis, and Kotlar 2018). T
The desire to maintain innovativeness
over the long term provides family
members with an extra incentive to be
careful when working on the few
innovation projects they have and to
inject their
superior firm and market expertise into
those projects. Through this, family
members will use innovations that their
customers perceive as beneficial as a
means to extend the positive image of
their firms’ identity.
Board Social Capital
Next to human and financial capital,
social capital is one of the most
important factors for successful
innovation (Tsai and Ghoshal 1998).

274
Knowledge creation processes benefit
from interactions, and firms draw
extensively on external linkages (Brettel
and Cleven 2011) to develop new
products and services (Stanko, Fisher,
and Bogers 2017).
Nahapiet and Ghoshal (1998, 243)
define social capital as “the sum of the
actual and potential resources
embedded within, available through,
and derived from the network of
relationships possessed by an individual
or social unit.”
Social capital leads to inter- and intra-
firm exchanges of resources and
knowledge (Cuevas- Rodríguez, Cabello-
Medina, and Carmona-Lavado 2014) so
that these resources and knowledge
can be combined to create inventions
and innovations (Galunic and Rodan
1998; Nelson and Winter 1982).
At the level of the board of directors, the
number and the quality of board
members’ social ties determine the
effectiveness of their involvement in
275
managerial decision-making. Board
social
capital is an important contingency for
the link between family involvement and
the outcomes of innovation.
Hence, we expect that board social
capital is a crucial factor that influences
the effectiveness of these decisions
when, for instance, setting a strategic
agenda for innovation and providing the
necessary resources to pursue it.
It is important to distinguish between
board members’ internal and external
ties of social capital
(Cuevas-Rodríguez, Cabello-Medina, and
Carmona-Lavado 2014).
“Internal ties refer to the relationships
within the social structures of a
collective (i.e., group or organization),
while external ties are relationships that
span boundaries to other individuals or
collectives” (Gedajlovic et al. 2013,
461).

276
Thus, internal board social capital
denotes the board members’ internal
relations – bonding – which provide the
board with collective cohesiveness and
the pursuit of collective goals.
While external board social capital
denotes the connections between board
members and other actors in their
network – bridging – which enable them
to access resources embedded in that
network (Adler and Kwon 2002).
Researchers have established that both
bonding and bridging play important
roles in innovation processes
(Vanhaverbeke, Gilsing, and Duysters
2012).
Family members typically possess
strong internal and external social
capital (Barroso-Castro, Villegas-
Periñan, and Casillas-Bueno 2016).
Both are rooted in the families’
idiosyncratic values, goals, and
networks (Sorenson et al. 2009), and
are essential features of family firm

277
operations (Shi, Shepherd, and Schmidts
2015; Uhlaner et al. 2015).
They facilitate information flows,
knowledge creation (Nahapiet and
Ghoshal 1998), and creativity (Perry-
Smith and Mannucci 2017), and
determine the success of external
partnerships (Ireland, Hitt, and
Vaidyanath 2002).
Hence, it is through their social capital
that board members can effectively
counsel on strategy, access external
information and valuable resources, tap
on skill and expertise, and provide the
family firm with the necessary
legitimacy for its operations (Haynes
and Hillman 2010; Pfeffer and Salancik
1978).
Internal board social capital (i.e. board
members’ firm tenure) attenuates the
negative relationship between family
involvement and the number of their
inventions.
Two arguments support this view.

278
First, board members’ internal social
capital originates from shared co-
working experience (Barroso-Castro,
Villegas-Periñan, and Casillas-Bueno
2016) and leads to shared languages
and narratives, and mutual trust, which
is all essential for effective decision-
making at the group level (Pearson,
Carr, and Shaw 2008; Tsai and Ghoshal
1998).
Families typically follow conservative
strategies that seek to reduce
uncertainty (Duran et al. 2016).
If family board members lack the skills
to tightly monitor and evaluate R&D
projects, they will probably also judge
the risks of financial and technological
failure to be higher (Rondi, De Massis,
and Kotlar 2018), and will consequently
use their influence in the board to reject
the more uncertain projects.
Collective cohesiveness, in this sense,
will enable non-family board members
to convince family board members to

279
invest in new, less-developed, promising
technologies.
In addition, internal board social capital
is highly valuable for the diffusion of
externally-sourced knowledge within the
firm (Tushman and Romanelli 1983;
Tushman and Scanlan 1981).
This diffusion is highly important for
invention processes, and usually
involves the recombination of new and
existing knowledge (Adams, Bessant,
and Phelps 2006; Galunic and Rodan
1998; Nelson and Winter 1982).
Family members are a useful part of
board social capital and high internal
board social capital “ensures that any
resources that owners bring in from the
outside will be used for the benefit of
the group or firm” (Uhlaner et al. 2015,
9).
Internal board social capital amplifies
the positive relationship between family
involvement and the relative market
relevance of innovations.

280
There are three main points in favor of
this notion.
First, the internal board social capital
leads to the absorption and diffusion of
external knowledge within the firm and
the intra-firm dissemination of internal
resources and knowledge (Arregle et al.
2007). Friendly, trusting, and respectful
relationships between the family and
other firm members (Cuevas-Rodríguez,
Cabello-Medina, and Carmona-Lavado
2014) facilitate smooth information
flows (Nahapiet and Ghoshal 1998) and
enable frictionless creativity (Perry-
Smith and Mannucci 2017).
Family members will use the
effectiveness with which they can make
strategic decisions (Corbetta and
Salvato 2004; Dalziel, Gentry, and
Bowerman 2011; Hillman and Dalziel
2003) to provide product developers
with the necessary information and
resources to create innovations that
outperform those of their competitors.

281
Second, trusting, high-quality
relationships and cohesiveness in the
boardroom lead to meaningful
knowledge transfer and intense
collaboration, including the exchange of
the non-trivial knowledge that is critical
for innovation. At the same time, such
relationships reduce the need for tight
monitoring and control systems, which
gives researchers more time and
freedom to process internal and
external knowledge, as well as to
exchange ideas with family and non-
family members of the firm to create
meaningful innovations that appeal to
customers.
Finally, board members’ firm tenure
drives the strength of their internal
relations, providing the board with
collective cohesiveness and the pursuit
of collective goals (Adler and Kwon
2002) that correspond to the family’s
values and goals (Sorenson et al. 2009).
Shared languages and narratives, and
mutual trust that come along with
internal board social capital, lead to
282
effective decision-making at the group
level (Pearson, Carr, and Shaw 2008;
Tsai and Ghoshal 1998).
CORPORATE GOVERNANCE AND CSR
The new millennium has witnessed a
surge in social, environmental and
governance related scandals.
Whether it is the:
 Volkswagen emissions scandal
(2008–2015)
 Global Financial Crisis (GFC; 2007–
2009)
 Deepwater Horizon – BP Gulf of
Mexico Oil Spill (2010)
a common thread across these
incidents is the interplay between
corporate governance (CG) and
corporate social responsibility (CSR)
Such scandalous incidents have
spurred the interest of academics,
practitioners, and legislators in
attempting to understand how the

283
 concepts of CG and CSR interlink and
overlap with each other.
Theoretically, research in the field has
progressed along two directions: 1) CG
as a foundation for CSR
2) CSR as an umbrella term that
subsumes responsible governance
At the same time, there is greater
recognition that different national
business systems (NBSs) and their
corresponding institutional settings may
shape business– society relationships,
and could have varying consequences
for the CG–CSR.
Traditionally, CG entailed rules that
provided a formal structure to the
relationship among boards of directors,
shareholders and managers with a view
to resolve assumed agency conflicts
between principals and agents.
However, a more recent, wider view on
CG includes consequences of corporate
decision- making on nonfinancial
stakeholders as well.
284
In this vein, we can define CG as
encompassing the structures that
specify the “rights and responsibilities
among the parties with a stake in the
firm”as well as the configurations of
organizational processes that affect
both financial and nonfinancial firm-level
outcomes.
Given the emphasis on cross-national
CG–CSR relationship, we conceptualize
CSR as an umbrella term that
encompasses policies, processes, and
practices (including disclosures) that
firms put in place to improve the social
state and well-being of their
stakeholders and society (including the
environment) whether undertaken
voluntarily or mandated by rules, norms,
and/or customs.
o improve our understanding of how the
CG–CSR manifests across countries, it is
useful to cluster different institutional
systems.
Because there is a need to understand
cross-national differences in both CG
285
and CSR And because stakeholder
identities, expectations and interests
vary cross-nationally and
they can influence and be influenced by
how corporations are governed.
Although there are several frameworks
that have been progressed in the
domain of NBS they often are focused
more on developed nations included
within the Organisation for Economic
Co-operation and Development (OECD)
and limited Asian economies.
In addition, grouping a large number of
different countries into a single cluster
of “non- Anglo Saxon” economies result
(several NBS studies are in this way) in
sweeping assumptions about the
similarity of institutional pressures
operating therein.

National Business Systems Clusters

Witt and colleagues’ (2017) NBS
approach provides a more nuanced

286
overview of 61 major economies that
comprise a significant proportion of the
landscape of the business systems in
the world economy.
By relying on both formal and informal
institutional complexities and combining
qualitative and quantitative data, this
comprehensive framework categorizes
the world’s major business systems into
nine clusters, allowing to better capture
distinct patterns in our review of the
international CG–CSR literature.
These nine clusters include: liberal
market economies, coordinated market
economies, highly coordinated
economies, European peripheral
economies, advanced emerging
economies, advanced city economies,
Arab oil-based economies, emerging
economies, and socialist economies.
Liberal market economies (LMEs)
• LMEs (e.g., the United Sates, the
United Kingdom, Australia, Canada,
Ireland, and New Zealand) national
institutions encouraging individualism,
287
workers and other actors are less
organized and firms coordinate their
activities through the market
mechanism and hierarchies.
• Corporate governance norms are
guided by agency theory and
shareholder value maximization. •
Greater reliance on stock markets
translates into short-termism, interfirm
relations are more
competitive and at arm’s length.
Coordinated market economies
(CMEs)
• CMEs (e.g., Austria, Belgium,
Denmark, Finland, the Netherlands,
Norway, Sweden, and Switzerland)
emphasize collectivism, with heavy
reliance on nonmarket forms of
coordination.
• Greater dependence on credit-based
financial systems translates into long
termism; interfirm relations are
collaborative in nature and unionization
is accepted.
288
• The State has a greater role in
organizing economic activities.
• Greater focus on value maximization
for multiple stakeholders, influencing
how firms perceive both CG and CSR
norms and behaviors.
Highly coordinated economies
• In highly coordinated economies (e.g.,
Japan), States play a dominant role in
the coordination of economic activities
and regulation of markets, and there
exists a high level of paternalistic
authority.
• General prevalence of insider-
dominated governance structures.
European peripheral economies
• European peripheral economies (e.g.,
France, Greece, Italy, Portugal, Spain,
Czech Republic, Hungary, Poland,
Romania, and Slovakia) consist of
southern European countries as well as
the central European countries west of
Ukraine.

289
• This cluster exhibits a strong presence
of industrial and craft unions, banking-
led financial systems, and hierarchical
decision-making at firm and national
levels.
• Family and state ownership are
important with moderately strong
corporate governance norms in place.
Advanced emerging economies
• Advanced emerging economies (e.g.,
Chile, Turkey, Israel, South Africa,
Korea, and Taiwan) comprise a
geographically heterogeneous group of
emerging countries that reflect heavy
reliance on developmental state
policies.
• Common themes include banking-led
financial systems, hierarchical
governance at the firm and national
levels, a dominant role of families in
firm ownership and control, and well-
defined corporate governance norms,
which can have distinctive ramifications
on CSR.

290
Advanced city economies
• Advanced city economics (e.g., Hong
Kong and Singapore) represent trade
dependent hubs that primarily rely on
banking-led financial systems with very
high levels of inward foreign
investment.
• Market criteria are important in these
economies, with hierarchical decision-
making within firms and superior
corporate governance norms.
• A strong role of family ownership is
emphasized in Hong Kong, whereas
State ownership remains strong in
Singapore. The state is regulatory in
Hong Kong; it includes a developmental
element in Singapore and is highly
effective in character. These specificities
shape corporate CSR orientations.
Arab oil-based economies
• Arab oil-based economies (e.g.,
Kuwait, Qatar, Saudi Arabia, and the
United Arab Emirates) primarily rely on
oil production and exports, with ongoing
291
efforts at diversifying into other
industries.
• Institutional characteristics include
absent or weak unions rights, banking-
led financial investments and low
foreign investment, hierarchical
decisionmaking at firm and national
levels, and an emphasis on the role of
powerful families and state in the
economy, with the latter exhibiting a
combination of predatory,
developmental, and welfare
characteristics.
• These economies demonstrate poor to
average corporate governance norms as
well as peculiar CSR practices.
Emerging economies
• Emerging economies (e.g., Algeria,
Argentina, Bangladesh, Brazil, China,
Colombia, Egypt, India, Indonesia,
Kazakhstan, Malaysia, Mexico, Morocco,
Nigeria, Pakistan, Peru, Philippines,
Russia, Thailand, Ukraine, and Vietnam)
represent the largest cluster with a very
wide geographical spread of countries
292
exhibiting a combination of predatory
and developmental states.
• Emerging economies exhibit relatively
low levels of per capita GDP and weak
institutional structures including
suppressed union rights, important role
of credit and banking-led finance
aligned with developmental goals of the
state, hierarchical decision-making at
firm and national levels, and family and
state ownership of firms with poor
corporate governance norms.
Socialist economies
• Socialist economies (e.g., Cuba and
Venezuela) represent the old world with
weak union rights, banking-led financial
systems coupled with absent or very low
foreign direct investment, hierarchical
decision-making at firm and national
levels, state ownership and control of
firms (with family involvement in
Venezuela), very weak corporate
governance norms and existence of a
predatory state.
CSR, CG, and NBSs
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Following Jamali and colleagues (2008),
we can also categorize the nature of the
relationship between CG and CSR into
two strands:
(a) CSR as a function of CG (b) CG as a
function of CSR
a) Depictions of CSR as a function of CG
explores how different configurations of
CG systems, structures, and processes
impact firms’ CSR policies and practices
b) Research that encompasses CG as a
function of CSR employs CSR as a tool
for effective and responsible
governance. It is argued that CSR
policies and practices can promote
stakeholder engagement (customers,
employees, and society), improving
governance within organizations and
yielding business-related benefits.
When we explore how these CG–CSR
trends are classified across business
systems, the academic debate across
business systems is dominated by (a)
the portrayal of CSR as a function of CG

294
across NBSs (88%), with scant focus on
how CSR influences CG (12%).
Within the LME, previous literature
uncovers a frequent use of agency
theory (22%).
In terms of CG and CSR, agency
theorists argue that CG mechanisms–
such as board monitoring, top
management incentive schemes, and
firm ownership structures–should
encourage the adoption of CSR activities
only when they result in efficiency
benefits for the firm.
However, the rise of stakeholder logic in
LMEs is interesting in that it signals that
scholarship has embraced that CG is not
only about shareholder value
maximization, but also about the
relationships among multiple
stakeholders, such as investors,
employees, and society, creating
responsibility and accountability for the
impact of corporate actions on the wider
community and environment.

295
The majority of the research in LMEs
(87%) portrays CSR as a function of CG,
focusing on how board characteristics
affect CSR.
Although the bulk of studies
demonstrate support for both agency
and stakeholder theories such that
board gender diversity, board CSR
committee, board expertise, and board
independence are positively associated
with CSR, there are fewer studies
reporting either no significant effect or a
negative association between the two.
We can also find that, broadly speaking,
board networking capacity, board
diversity on age and race parameters,
and multiple directorships positively
affect CSR showing support for resource
dependence theory.
Studies also show that firms with an
audit committee that exhibits higher
expertise positively influences CSR.
With respect to CEO characteristics, the
impact of CEO duality, tenure, and age
on CSR depicts mixed results, with some
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studies reporting a negative effect and
others reporting a positive impact.
This indicates a mixed support for
agency logic and the need for adopting
a micro-foundational perspective, which
can explain how attitudinal variables
related to CEOs impact firm outcomes
such as CSR, while also embracing the
impact of external CG mechanisms
concomitantly.
Studies investigating the effect of
executive compensation on CSR report a
positive effect with CSR-related bonus
being positively associated with CSR
activities.
The effect of media coverage and
legislation pressure on CSR is not clear,
with some studies reporting a negative
effect and other studies reporting a
positive effect.
With respect to ownership structure,
family ownership and CEO shareholding
are found to be negatively related to
CSR, whereas the effects of
blockholders, institutional ownership,
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insider ownership, and board ownership
remain inconclusive.
These findings align with the premise of
agency theory when applied to family
firms, which suggests that family
owners are preoccupied with
accumulating family financial wealth
and consider CSR investments as
additional unnecessary costs.
Clearly, there is a need for more
nuanced research that investigates the
circumstances under which institutional
ownership, insider ownership, and board
ownership can positively or negatively
affect CSR.
Although scarce, there are some studies
within LMEs that have investigated CG
as a function of CSR.
Aligned with agency theory arguments,
this strand highlights that higher CSR
investments tend to reduce the total
compensation for CEOs.
Yet, we can also find evidence that firms
that tend to adopt measures to be more
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environmentally responsible reward
their CEOs with higher remuneration.
The latter aligns with Team Production
Theory (TPT) arguments suggesting how
public corporations are a nexus of
specific investments made by varied
stakeholders with a view to sharing the
benefits of team production, and that
CEOs who enable an increase in such
benefits are remunerated well for
performing this function.
Moreover, studies show that while
higher corporate giving tends to
positively influence investor
perceptions, creates favorable media
coverage as well as promotes dialogue
with shareholder activist groups, such
firms concomitantly exhibit weak CG
particularly on board monitoring and
increased insider shareholder activity.
Adopting theoretical pluralism in this
case can help shed light on how some
CSR practices (e.g., corporate giving)
can lead to a dual effect on firms.
Although it leads to higher media
299
coverage and a better overall reputation
for the company, it can also weaken the
firm’s governance structure by
decreasing board monitoring.
In this manner, LME as a cluster shows
an interesting patchwork of theories
that explain the CG– CSR relationship
ranging from well-established agency
and stakeholder theory arguments, to
evidence and potential of employing
lesser explored arguments from TPT as
well as stewardship theories.
Within the non-LME clusters, agency
theory appears to be the dominant lens
in CG–CSR with the exception of the
CME grouping where we witness an
opposing trend with stakeholder theory
being employed more (56%) than
agency theory (22%).
The trend of the importance of agency
theory in scholarship contextualized in
non-LME business systems can be
explained in part by the diffusion of
management theories in academia.

300
Indeed, management and organizational
knowledge has been traditionally
conceptualized through models and
theories originating from the LMEs,
especially from the United States,
despite apparent distinctions in other
business systems.
At the same time, we also uncover a
more complex picture of the typically
conceptualized agency problem in this
cluster.
Specifically, advanced emerging, Arab
oil, and emerging economies are
different from LMEs in that these
economies are centered around the
stake of the founding family and the
state, coupled with less developed
formal regulatory institutions.
Although the presence of a close-knit
group, such as families that are involved
in ownership
and management, might automatically
align the interests of shareholders and
managers, it also creates a potential for
families, clans, and states to abuse the
301
interest of other minority investors, such
as foreign institutions, leading to
principal–principal conflicts.
Eventually, this phenomenon decreases
the efficient allocation of resources
toward CSR activities.
Furthermore, as firm managers in such
economies are closely connected to
family owners while also being agents of
minority investors, it exasperates
principal–manager–principal goal
incongruence.
In the non-LME context, we also can find
some limited application of legitimacy
(19%) and institutional (15%) theories in
CG–CSR research. For instance, within
the advanced emerging economies,
27% of studies apply legitimacy theory
followed by the institutional theory
(18%).
This trend is also captured within
emerging economies, where studies also
tend to employ multitheoretical lenses
combining institutional and agency
theories.
302
In contrast to other non-LMEs, CMEs’
studies are dominated with institutional
theory (22%) compared with legitimacy
theory (11%). Although emphasis on
legitimacy is at the core of both
institutional and legitimacy theories,
both theories are built on different
motivational assumptions that are
important to unpack for advancing the
CG–CSR scholarship.
Whereas institutional theory emphasizes
concepts of mimetic, normative, and
coercive isomorphism, where companies
adopt similar structures and practices to
those adopted and legitimized within an
organization field, legitimacy theory is
built on the notion of a social contract,
where an organization deliberately
employs various legitimization tools,
such as CSR reports and disclosures, to
communicate its conformance within a
socially constructed system of norms,
values, and beliefs to its internal and
external stakeholders.
Hence, CG and CSR in the non-LME
context are driven both by institutional
303
pressures for conformity to national,
industry, or professional norms and
regulations (institutional theory) as well
as by a desire to gain a social license to
operate by engaging with and fulfilling
internal and external stakeholders’
expectations (legitimacy theory).
Within the non-LMEs’ cluster, research
has mainly explored CSR as a function
of CG (90%) compared with scant
research (10%) capturing CG as a
function of CSR.
In the Arab oil economies, family and
government ownerships are positively
related to CSR, institutional ownership
has no significant effect.
Furthermore, it is also suggested that
western mechanisms of sound
governance practices, such as the
existence of an audit committee and
independent directors on boards, do not
impact CSR. This highlights context
dependence of CG–CSR and calls for
more research across NBSs, specifically
in the Arab cluster.
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In advanced emerging economies, we
find that the majority of studies have
investigated CSR as a function of CG
(91%).
These studies find support for
stakeholder and agency theory
arguments, and predominantly focus on
the effects of board structures on CSR.
They highlight that board independence
and board gender diversity positively
affect CSR, whereas board size and the
presence of a board CSR committee
have no effects revealing lack of support
for RDT.
Research also shows that CEO duality
negatively impacts CSR and that CEOs
with political connections are more
likely to lead their companies to invest
in CSR. Research has also tilted toward
investigating the effects of ownership
type on CSR, with results supporting
the agency perspective such that
concentrated owners are inclined to
reduce CSR investments, if that latter is
employed by managers for
entrenchment purposes.
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Accordingly, we find that blockholders
and board ownerships negatively impact
CSR, whereas institutional owners,
especially pension funds characterized
as long-term institutional owners,
positively affect CSR.
Within the CME cluster, around 89% of
the research focuses on CSR as a
function of CG.
There is a general consensus on the
important role that the board of
directors (BODs) plays in catalyzing
various CSR activities (e.g.,
philanthropy, social performance,
internal and external CSR).
Particularly, research shows that board
gender diversity and board CSR
committee are positively associated
with CSR aligning with stakeholder
theory. However, research also indicates
inconclusive findings on the impact of
board size on CSR, with some studies
suggesting a positive effect and others
reporting no significant effect.

306
We can also note interesting findings
with respect to media coverage
affecting the interplay between CG and
CSR. Specifically, CSR performance of
firms with low public ownership is not
affected by media coverage whereas
firms with greater public ownership are
more reactive to media coverageand
significantly increase their corporate
social engagement. This indicates that
firms with concentrated ownership are
driven by their own values in their
pursuit of CSR whereas firms with
dispersed ownership do so from an
instrumental perspective to accumulate
reputational gains and improve
corporate image.
While scarce, research on CG as a
function of CSR (11%) suggests that
firms, such as natural resource
companies, that employ social
responsibility to secure a social license
to operate tend to also adopt
governance structures that enables the
setting up of accountability processes to
catalyze their CSR practices.

307
In emerging economies, a domination of
studies portraying CSR as a function of
CG is noted (94%).
Research demonstrates that companies
that have an independent audit
committee that meets frequently invest
more in CSR.
At the same time, we also find
inconclusive findings regarding the
relationship between board
characteristics and CSR. For example,
whereas some studies find that board
gender diversity, board independence,
board size, and CEO duality positively
affect CSR, other studies find no effect
or a negative effect on CSR.
We also find inconclusive findings
related to the effect of various
ownership structures on CSR. For
example, some studies portray family
and government ownership as
catalyzing CSR whereas others report
negative effects. Despite these
inconclusive findings, research on CEO
political connection and executive
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compensation seem to be in agreement
that such attributes are positively
related to CSR.
We can find some studies portraying CG
as a function of CSR. For example, there
is evidence that shows that CSR
positively affects minority investors’
participation in CG and can attenuate
their perception of the need for outside
monitoring. Similar to LMEs, we also find
that firms with better environmental
performance reward their top
executives with higher remuneration .
This demonstrates reputation and trust
building effects of CSR on governance,
while also aligning with TPT arguments.
In European peripheral economies, 70%
of the research is based on CSR as a
function of CG. Studies show that board
size is positively related to CSR and that
CEO duality negatively affects CSR,
whereas findings for board
independence remain inconclusive.
Regarding the ownership structure, it
has been shown that government and
309
foreign ownership are negatively related
to CSR, whereas the results for
blockholders’ effects on CSR remain
inconclusive. The negative association
between state ownership and CSR is
interesting and counterintuitive and
points to the behavioral perspective to
CG that shows that states may separate
their welfare and investment decisions
in firms, the latter driven by political
and strategic value.
We also find evidence that media
coverage shapes the attitude of
independent directors toward CSR who,
when subject to media scrutiny, become
incentivized to pursue socially
responsible strategies to gain prestige
and accumulate reputational gains.
Studies that portray CG as function of
CSR (30%) explore the positive impact
of CSR on CG. For instance, research
finds that firms with higher levels of CSR
behavior exhibit lower managerial
opportunism and internal stakeholder
commitment, resulting in improved CG.

310
Finally, in highly CMEs, with reference to
that CSR as a function of CG, in Japan,
gender diversity on boards and
institutional ownership are positively
associated with CSR.
Overall, across the non-LME cluster,
agency and stakeholder theories are
prominent lens, with some studies
employing RDT, institutional and
legitimacy theories, as well as the
behavioral perspective

Баба

Board Leadership and Company Purpose

Sibel Yamak
Definitions of corporate governance
vary primarily as there is no universal
agreement on the purpose of business
organisations
hleifer & Vishny (1997) define corporate
governance as “the ways in which
suppliers of finance assure themselves

311
of getting a return on their investment”.
=> Shareholder theory – Objective of
the firm is to maximise shareholder
value
• Sir Adrian Cadbury (1999) “Corporate
governance is concerned with holding
the balance between economic and
social goals and between individual and
communal goals....the aim is to align as
nearly as possible the interests of
individuals, corporations, and society”.
=> Stakeholder theory – Objective of
the firm is to balance the interest of the
key stakeholders in the organisation.
Purpose and revision of the corporate
governance concept
Goergen and Renneboog (2006)
definition allows for differences across
countries in terms of the main objective
of the firm:
“Corporate governance system is the
combination of mechanisms which
ensure that the management (the
agent) runs the firm for the benefit of

312
one or several stakeholders (principals).
Such
stakeholders may cover shareholders,
creditors, suppliers, clients, employees
and other parties with whom the firm
conducts its business.”
The Purpose of the Firm and the
Concept of Corporate Governance
Shareholder Perspective (Clegg et al.,
2021:4)
Most neoclassical economists’
ideological orientation is to regard
optimal corporate governance as best
achieved when shareholder value is
delivered
(Lazonick&O’Sullivan, 2000)
Sorkin (2002) asks:
Is it Mark Zuckerberg’s social
responsibility to allow wanton
disinformation to roam over his social
media platform? Is it Zuckerberg’s
responsibility to lobby to get rid of a
pesky foreign competitor while fighting

313
for his company to be free from anti-
competitive restraints and any
accountability, so long as it increases
his bottom line?
Criticisms over the validity of
shareholder value definition of purpose
(Davis 2006)
• Business ventures founded on such
notions are essentially selfish, and their
legimacy should not be taken for
granted (Drucker, 1987)
The Purpose of the Firm and the
Concept of Corporate Governance
Stakeholder Perspective (Clegg et al.,
2021:6-7)

Stakeholder theory affirms that the goal

of an enterprise is to respond to the
needs of a group of constituencies.
The list of stakeholders expands with
changes in the legitimation of social
expectations regarding the probability
of being heard.

314
What creates value for one stakeholder
may destroy value for another =>
Tension
The goal of responding to several
stakeholders may constitute an
impossible task if left to voluntarism;
hence, the importance of regulation,
despite its insufficiency in transforming
many salient firms into good corporate
citizens, as successive scandals denote
(Baker, Purda, & Saadi, 2020).
Criticisms:
 The notion of the stakeholder can
now ‘virtually include everyone,
everything, everywhere’
 Accountability to everyone means
accountability to no one
 The Purpose of the Firm and the
Concept of Corporate Governance
Integrative Social Contracts
Perspective

315
Integrative social contracts theory
(ISCT) portrays the firm as part of a
community to which it is bound by two
different contracts:
a normative contract equivalent to
classical social contractarian theories,
as well as
a contract that exists, implicitly,
between the members of an existing
social group (Donaldson & Dunfee,
1994)
By situating the organization in its
community, ISCT depicts corporate
purpose as a form of moral alignment
with the surrounding logics and culture.
Purpose: an organization’s capacity to
conduct its business in line with social
expectations while curating its
responses in line with changes in these,
and preserving the essence of tradition
• Criticism: Reliance on local traditions
that can introduce an element of moral
relativism and even tolerance for
established but ultimately unfair

316
practices, such as gender discrimination
(Dunfee, 1998)
The Purpose of the Firm and the
Concept of Corporate Governance Social
Mission Perspective

Social mission theory is a synthetic

understanding of purpose, now
interpreted as the emergence of a socio-
psychological process of creating social
value and human dignity at work.
Re-centring of purpose around
innovations creating positive social
impact (for the organizations) and
fulfilling the search for meaning in
positivity (for individual
contributors).
Criticism: Purpose at the organizational
or individual level may function as a
double- edged sword.
•

317
Can even work as a managerial tool of
control and a source of passion but also
disillusion (Schabram & Maitlis, 2017),
Potential paradox between idealized
vision and reality.
critical perspective to purpose

Organizations can also be perceived as

expressive systems that are oriented
towards cultivating possibilities rather
than fulfilling specific purposes defined
ex ante.
hese systems operate in an ‘open field’,
meaning that humans and their
creations are ‘ever-open’, ‘unfinished’
which is a ‘process of experimentation
and learning by doing: ideas, products
and environments are invented and
then understood through feedback’
(Clegg et al., 2021, p. 1).
Redefining purpose in business
encompasses a broader conception of
businesses’ effects on life. As such, each
concept of purpose is progressively
318
extended, from owners of capital
(shareholders), interested parties
(stakeholders), ethical judgements (civic
morals) to social mission and values
(generalized positivity).

The Board of Directors – Board

Functions, Leadership, and Dynamics

What Do Boards Do? Board Activities 1 –

Control Tasks

319
Board Activities 2 –
Service Tasks
 Advising - Advising on governmental
policy consultation
 Developing and embedding -
Developing and embedding new IT
systems
 Advising - Advising on legalities of
lease, articles of association, HR
issues (job re- evaluation,
redundancy programme)

320
  Representing - Representing the
board and company at external
events (conferences, community
events)
 Legitimising - Legitimising
organisational decisions
Board Activities 3 – Strategy Tasks
1) Planning new investment
projects
2) Discussion of alternative
internal investment projects
3) Changing company investment
strategy
4) Selecting merger partner
5) Decisions of take-over bids
6) Discussing corporate change
options and their implementation
7) Discussing and deciding on
geographic diversification of
organisation

321
Board Tasks/Functions

Board Tasks after Huse (2007)

Board Control Involvement
Output control (e.g. financial returns)
Quantitative control Behavioural control
Qualitative control (HR, products,
customer service)
Board Strategy Involvement
Ratifying strategic decisions
Shaping strategic decisions
322
Continuous influence on content,
context and conduct of strategy
Board Service Involvement
Resource dependency (networking,
lobbying)
Top-down advice (legal, technical,
financial)
Dialogue advice, Mentoring
Board Functions (Tricker, 2015: 183)

This part of today’s session has covered

the purpose of the firm and the
importance of the goal of the
organisation for the definition of

323
corporate governance, and the
tasks/functions of the board.

Definitions of corporate governance are

not independent of your view of the
purpose of the firm.
Board tasks are usually divided into
three since Zahra and Pearce (1989)
categorised these as control and
monitoring, service (or resource
provision) and strategy.

Corporate Social Responsibility,

Sustainability and Corporate
Governance

Learning outcomes
• To define CSR, sustainability and
sustainable governance
 To outline the recent developments
in relation to sustainability and
governance
324
  To explain different perspectives and
factors influencing sustainable
governance
What is Sustainability?
 • Economic development that meets
the needs of the present generation
without compromising the ability of
future generations to meet their own
needs (Brundtland, 1987)
 Sustainable development
 “...is about rethinking human-nature
relationships, re-examining current
doctrines of progress and modernity
and privileging alternate visions of
the world”
 (Banerjee, 2007:92)

325
Intergovernmental Panel on Climate
Change – the ‘key reference’ on
climate change-Findings
▪Climate change is already happening
▪It is mostly caused by man
▪It will continue
▪The rate of change is alarming
▪Extreme weather is getting more
frequent
▪It is urgent to stop further warming

326
▪This has serious social consequences
as well Climate Crisis

Corporate Social Responsibility

 Concept whereby companies
integrate social and environmental
concerns in their business operations
and in their interactions with their
stakeholders on a voluntary basis
(EU Commission)
 Seven core subjects of CSR are
organisational governance,
community
involvement/development, labour
practices, consumer issues, fair
operating practices, human rights
and the environment (ISO 26000)
327
 

 Corporate Governance
 The “system of checks and balances,
both internal and external to
companies, which ensure that
companies discharge their
accountability to all their
stakeholders and act in a socially
responsible way in all areas of their
business activity” (Solomon &
Solomon, 2004).

Limits of Corporate Governance

 There is hegemonic influence of
exclusively economic approaches in
CG theorising based on the concept
of dispersed ownership and primacy
of shareholder value in Anglo-
American context (Clarke, 2004).
 Convergence mainly through
structure and less through principles
like equitable treatment,
responsibility, transparency and
accountability which can easily
incorporate sustainability.
328
 

 Bridging Sustainability
&Corporate Governance
 • Need to bridge the divide between
CG and CSR&Sustainability.
• Social and environmental issues
are equally relevant as economic
value.


 What are the recent developments?



 The most influential lobbying body

for U.S. business interests, the
Business Roundtable in contradiction
to each "Statements on the Purpose
of a Corporation" it issued since
1997, endorsing the principle of
"shareholder primacy," on August
19th, 2019 it issued a new statement
that is radical in its near unanimous
endorsement by 181 of its 193
members (Inc., 2019):
 "While each of our individual
companies serves its own corporate
purpose, we share a fundamental
commitment to all of our
stakeholders. We commit to:
329
  Delivering value to our customers.
Investing in our employees.
Dealing fairly and ethically with our
suppliers. Supporting the
communities in which we work.
Generating long-term value for
shareholders.“

Davos Manifesto 2020

World Economic Forum has launched
the Davos manifesto 2020:The Universal
Purpose of a Company in the Fourth
Industrial Revolution
• The purpose of a company is to
engage all its stakeholders in shared
and sustained value creation.
 – A company serves its customers
by providing a value proposition that
best meets their needs.
 – A company treats its people with
dignity and respect.
 – A company considers its suppliers
as true partners in value creation.

330
  – A company serves society at large
through its activities, supports the
communities in which it works, and
pays its fair share of taxes.
 – A company provides its
shareholders with a return on
investment that takes into account
the incurred entrepreneurial risks
and the need for continuous
innovation and sustained
investments.

Davos Manifesto 2020

 A company is more than an
economic unit generating wealth. It
fulfils human and societal aspirations
as part of the broader social system.
 – Performance must be
measured not only on the return
to shareholders, but also on how
it achieves its environmental,
social and good governance
objectives.
 – Executive remuneration should
reflect stakeholder responsibility.
331
  A company that has a multinational
scope of activities not only serves all
those stakeholders who are directly
engaged, but acts itself as a
stakeholder – together with
governments and civil society – of
our global future.


 What are the best practices?

 Ray Anderson - Interface
 Businesses as “plunderers”
“People like me will go to the jail”
He became at the end a “recovering
plunderer” championing
sustainability in Interface.
Sustainability Journey
CEO Study on Sustainability (UNGC
Accenture, 2019)
 54% of CEOs say environmental
degradation is increasing their
sustainability efforts.
 The 2019 UN Global Compact
Progress Report showed that 48% of
companies are implementing
sustainability into operations
332
  In 2019, just 21% of CEOs believe
business is playing a critical role in
contributing to the Goals.
 Unanimous agreement that
sustainability is critical to their future
success


 What are the forces behind the

sustainable governance?

333
Why to consider sustainability?
SDGs - a growth opportunity for
companies:
 Companies gain a first-mover
advantage by positioning themselves
as SDG leaders
 Corporate Environmental
Performance- positive impact on
corporate performance.
 Brand differentiation- 4% growth in
responsible brands against 1 % for
334
 the those without a responsibility
commitment.
 Meeting customer demands-66% of
the consumers are willing to pay
more for sustainable brands (Nielsen
Report, 2015)

Why to consider sustainability?

 Cost reduction-reducing the use of
energy, waste..
 Increase in collaboration
 Innovation – new market
opportunities, products, processes,
services
 Improved community wellbeing-
ethically sourced products
 Environmental protection
 Employee satisfaction-employees
willing to get paid 10 % less in
responsible companies

Why to consider sustainability?

335
  Increased government regulatory
capacity-EU Emission Trading
System
 Reporting trend
 UN Global Compact
 Licence to operate for the businesses
 Social movements

How to consider sustainability?

 Assess the SDGs against company
policies and practices.
 Use the SDGs to inform strategy
development.
 Review the SDGs as part of target
setting.
 Apply the SDGs to impact monitoring
and measurement.
 Consider the SDGs as part of
reporting, such as an SDG index.


 Shift from dominant

perspective ?
 Shareholder primacy maintains that
corporations exist principally to
serve shareholders
336
 

 Alternatives?
 Pluralist approach: to safeguard the
interests of the other stakeholders
even at the detriment of
shareholders
 Enlightened shareholder value
approach: take into account longer
term considerations and interests of
various stakeholders in advancing
shareholder value

337
Critical a cal assessment of ESG
metrics

Story of ESG metrics

338
  ➢ ESG metrics are used as a proxy
for sustainability performance.
 ➢ The story of ESG investing began
in January 2004 with the initiative of
the
former UN Secretary General Kofi
Annan.
 ➢ Kofi Annan wrote to over 50 CEOs
of major financial institutions,
inviting them to participate in a joint
initiative under the auspices of the
UN Global Compact and with the
support of the International Finance
Corporation (IFC) and the Swiss
Government.

Story of ESG metrics

 ➢ ESG issues were first mentioned
in the 2006 United Nation’s
Principles for Responsible Investment
(PRI) report consisting of the
Freshfield Report and “Who Cares
Wins.”

339
  ➢ ESG criteria was, for the first time,
required to be incorporated in the
financial evaluations of companies.
➢ This effort was focused on further
developing sustainable investments.
➢ Initially, 63 investment companies
composed of asset owners, asset
managers and service providers
signed with $6.5 trillion in assets
under management incorporating
ESG issues. This number increased to
2450 signatories representing over
$80 trillion in asset under
management in June 2019.

Pros and cons of ESG

• ESG metrics have been generally well
received, however, there are also
concerns around their elaboration and
validity.

What are the pros of ESG metrics

340
➢ ESG data have been used mainly to
measure firms’ adoption of CSR policies
or corporate social performance (CSP)
regarding their social and environmental
conduct
➢ ESG is also used to measure firms’
involvement in wrongful business
conduct (De Felice, 2015).
 ➢ ESG presents a practical
relevance for managers and
investors who rely on these ratings
to make strategy and investment
decisions.
 ➢ These are holistic indices that
attempt to assess corporations’
every attitude or behaviour and boil
it down to a single metric.
 ➢ Guidance to integrate sustainable
development goals into corporate
activities

Pitfalls of ESG metrics

 ➢ Holistic indices is the sheer
number of categories
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  ➢ Incoherence of weighing so many
disparate qualitative factors against
each other. There is no objective way
to balance an exemplary record on
labour relations or gender pay equity
against a high carbon footprint.
 ➢ Subjective nature of assessments.
What is considered as renewable is
debated. Focus on human rights but
did not exclude famous companies
supplying from countries with poor
worker rights
 ➢ Greenwashing, loose half
measures, overly rosy forecasts
leads to a false sense of security
 ➢ Surface level, box ticking
compliance activity
 ➢ Not reliable data

Pitfalls of ESG metrics

 ➢ ESG data suffers also from
temporal inconsistencies and lack of
details regarding the concerns or
controversies. Difficulties to identify
when the wrongful business conduct
342
 has taken place (i.e., in which year/
years).
 ➢ Some of these scores provide the
year in which the alleged wrongful
conduct was discovered or
sanctioned (i.e., via a fine or a
judicial process, etc.), which may
differ from the year in which the
wrongful conduct took place.

Pitfalls of ESG metrics

➢ ESG data includes ad hoc and poorly
transparent scoring of corporate
involvement in wrongful business
conduct.
➢ Most ESG raw data is codified using
proprietary methodologies that often
require the use of ad hoc loadings and
weighting exercises, which depend on a
wide array of dimensions also defined
arbitrarily by the data providers
 ➢ For instance, Sustainalytics offers
a battery of controversy indicators
measured on a scale of 0 to100,
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 scored depending on the harm that
the controversy is deemed to
generate on both the impacted
constituencies and the company’s
own operations. The way in which
the analysts meld together all these
criteria and come up with a number
is not entirely transparent.
 ➢ MSCI KLD is more straightforward
because it uses dichotomous yes/no
coding for each concern. However,
this comes at the cost of treating all
concerns and all firms involved in at
least one controversy as equally
serious.

ESG metrics
 ➢ Despite the evolution of ESG
metrics and their popularity as a
proxy for sustainability performance,
the metrics remain flawed.
 ➢ Lack of transparency continues to
be a key issue (Busch, Bauer, &
Orlitzky, 2016; Delmas & Blass,
2010).
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  ➢ ESG rating agencies have
disclosed more information in
relation to their methodology, much
information crucial for meaningful
interpretation and accurate
comparison has not been fully
disclosed.
 ➢ Changes in the ESG information
market as new agencies are
launched and established data
providers enter the market
exacerbates transparency concerns
and creates additional confusion
(Delmas, Etzion, & Nairn‐Birch,
2013).

Pitfalls of ESG metrics

 ➢ There is still no standard for ESG
metrics, which means that data are
fragmented and inconsistent due to
differences in data collection,
incompatible data formats, and
different levels of quality control
(Sethi, 2005, Juravle & Lewis, 2008).

345
  ➢ Recent studies have also
uncovered other measurement
issues including bias toward larger
companies (Jun, 2016) and a lack of
predictive power (Chatterji, Levine, &
Toffel, 2009).
 ➢ Current practices in ESG
measurement need to improve
significantly if ESG metrics are to be
reliable and valid (Busch et al., 2016)

Pitfalls of ESG metrics

 ➢ The shortcomings of ESG metrics
mean that information might not
accurately represent a company's
ESG performance, which in turn
might mislead investors (Cheng et
al., 2015).
 ➢ Investment analysts and
academics should exercise caution
when using ESG metrics.
 ➢ However, the introduction of ESG
metrics is vital to accelerate the
growth of emerging SRI
markets.
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  ➢ ESG metrics render SRI
understandable and scalable to the
broader financial community and
help ensure the legitimacy of SRI as
an emerging financial market
(Déjean, Gond, & Leca, 2004).
 ➢ ESG metrics provide a broad
guidance (even though not precise)
for the leadership of the company to
shape the sustainable governance
and to evaluate cautiously the
performance of the suppliers and
competitors.


 ESG metrics providers

 ➢ KLD is arguably the oldest ESG
rating agency and the most popular
source of ESG metrics;
 ➢ There are other U. S.‐ and
European‐based rating agencies
such as: ➢ ASSET4 (Stellner et al.,
2015),
➢ Bloomberg (Nollet, Filis, &
Mitrokostas, 2016),
➢ Sustainalytics (Auer, 2016),
 ➢ EIRIS (Brammer et al., 2006; Wu &
Shen, 2013),
347
 ➢ SAM (Bird, Momenté, & Reggiani,
2012; Xiao, Faff, Gharghori, & Lee,
2013), ➢ Vigeo (Girerd‐Potin et al.,
2014),
➢ Innovest (Brzeszczyński &
McIntosh, 2014; Derwall et al., 2005)
➢ Refinitiv

Benefits of the ESG metrics

 ➢ Reviews of SRI market
development in different countries
reveal that SRI portfolios have grown
significantly after ESG metrics were
introduced or ESG rating agencies
were established.
 ➢ For instance, Cullis et al. (1992)
and Solomon, Solomon, and Suto
(2004) credit the 1983 establishment
of the U.K.'s EIRIS as one of the main
factors enabling the growth of the
U.K. SRI market.
 ➢ Similarly, the French SRI market
grew substantially after an ESG
rating agency (Arese, subsequently
known as Vigeo) was launched in
348
 1997 (Arjaliès, 2014; Gond &
Boxenbaum, 2013).
 ➢ This acceleration is amplified
when the establishment is
accompanied by compatible
regulation and adoption of the
metrics by influential market players
(Kreander, McPhail, & Beattie, 2015;
Vasudeva, 2013).
 BOARD COMPOSITION, EVALUATION
AND SUCCESSION
BOARD COMPOSITION IN ITALIAN LISTED
COMPANIES
Size
• Average board size is 10 which
appears to be stable Independence
 As of the end of 2020, half of the
members of the BoDs are
independent by the Corporate
Governance Code (CGC) and/or the
Consolidated Financial Act ([Link].
58/1998 Testo Unico della Finanza -
TUF).

349
  This is in line with the previous two
years but increasing by around ten
percent compared to 2011.
Minority directors
• The percentage of companies with
at least one minority director is
growing (more than 56% of listed
firms vs around 37% in 2011).
BOARD COMPOSITION IN ITALIAN LISTED
COMPANIES
Interlockers
 Nearly 2 directors in every board
hold multiple directorships in other
listed companies.
 This is valid for the majority of listed
companies (168 out of 216,
representing 97% of total market
capitalisation)
 The number of interlocks increases
with companies’ size (on average 3
interlockers).
 Interlockers usually do not exceed
50% of board members (namely 85
firms where they account for less
350
 than 25% of the board and 66
additional companies where the
share of interlockers varies in the
range 25%-50%).
 Finally, 48 small-sized firms, overall
representing 2.7% of total market
value, display no interlocker on
board.
 BOARD COMPOSITION IN ITALIAN
LISTED COMPANIES
 Age
 • Average age is 57 years Foreign
Directors
 • Foreigners constitute 5.5% of the
cases. Education and experience
 • The directors hold a first degree in
more than 89% of the cases and
have a managerial background in
about 66% of the cases.
 Women directors
 • There is an increase in the
presence of women 41%, due to the
application of the provisions on
gender quotas of 2/5 (Law no.
120/2011 and Law no. 160/2019).

351
BOARD COMPOSITION IN ITALIAN LISTED
COMPANIES
Directors with sustainability and
digital skills
 Directors with sustainability skills
hold 14.6% of total positions; the
figure is higher among larger
companies (19.3%) and female
directors 21,5% compared to male
directors (10,2%).
 Directors with digital skills hold 16%
of overall positions; this figure is
substantially stable across company
sizes, although higher among women
compared to men (19% vs 14%).
 The percentage of firms where at
least one board member has either
sustainability or digital skills is equal
respectively to 72% and 74%, while
28% of companies show at least one
director with both skills.
 BOARD EFFECTIVENESS
 • “Board effectiveness is determined
by the board’s ability to successfully
carry out their control, service and

352
 strategy roles (or tasks)” (Farquhar,
2011).

BOARD EFFECTIVENESS AND

EVALUATION • Board evaluation is
important to ensuring board
effectiveness.
• “When done effectively, board
evaluations provide a forum for
directors to review and reinforce
appropriate board and management
roles and ensure that issues that may
lie below the surface are identified and
addressed promptly. In short,
evaluations give the board an
353
opportunity to identify and remove
obstacles to better performance and to
highlight best practices” (Spencer
Stuart, 2013)
BOARD EVALUATION
2018 UK Code of Corporate
Governance Principle L (similar to
Italian Code):
•
Annualevaluationoftheboardshouldconsi
deritscomposition,diversityandhow
effectively members work together to
achieve objectives. Individual evaluation
should demonstrate whether each
director continues to contribute
effectively.
BOARD EVALUATION (2)
2018 UK Code of Corporate
Governance Provision 21:
• There should be a formal and rigorous
annual evaluation of the performance of
the board, its committees, the chair and
individual directors. The chair should

354
consider having a regular externally
facilitated board evaluation. In FTSE 350
companies this should happen at least
every three years. The external
evaluator should be identified in the
annual report and a statement made
about any other connection it has with
the company or individual directors.
BOARD EVALUATION (3)
2018 UK Code of Corporate
Governance Provision 22 :
•
Thechairshouldactontheresultsoftheeval
uationbyrecognisingthestrengthsand
addressing any weaknesses of the
board. Each director should engage with
the process and take appropriate action
when development needs have been
identified.
DETERMINANTS OF BOARD EVALUATION
 Board leadership
 Board Behaviour and the
connectedness of its members' (Six
C’s’ of board behaviour)
355
  Directors orientation and director
induction programmes
 Director development , training and
updating
 Directors Liabilities and indemnity
 Board Information
 Board Process - Meeting and
communication
 DETERMINANTS OF BOARD
EVALUATION : BOARD
EFFECTIVENESS AND DIRECTOR
BEHAVIOUR
 • Commitment • Character
• Collaboration • Competence •
Creativity
 • Contribution
DETERMINANTS OF BOARD EVALUATION
: DIRECTOR ORIENTATION AND
INDUCTION
 Board evaluation is also subject to
the training and the induction of
board members:
 The corporate governance code and
related regulations and laws
emphasise training

356
  With the fast changing aspects of
global business highlights the need
for continuous training of board
members
 A proper induction program reduces
the learning time before undertaking
the board responsibilities and
improves considerably the
contribution to board discussion of
the newly recruited member
 Experienced directors should usually
act as mentors to facilitate the
learning experience
DETERMINANTS OF BOARD EVALUATION
: DIRECTORS’ LIABILITIES
 Unlike shareholders, directors’
liability is not limited.
 Suitsagainstdirectorscancomefromsh
areholders,employees,creditors,cust
omers,suppliers,
regulatory bodies.
 Directors can be held legally
accountable in their personal
capacity, but also for the actions of

357
 other members of the board or top
management.
 Directors' personal assets can be at
risk and the claims can be for
unlimited amounts.
DIRECTORS’ INSURANCE
 To protect themselves, directors
could seek to protect their belongs
through taking an insurance.
However this is not available for all
who seek it.
 Successful, long-established
companies are more likely to be able
to obtain cover than others.
 The UK 2003 Higgs report
commented that "the cost of this
insurance is increasing and that the
coverage appears to be getting less."
 The insurance provides some
protection in the case of taking
wrong decision whilst governing or
managing the business ("wrongful
acts").
 Most policies covers against the cost
of legal fees and civil damages in

358
 defending a claim, however all
policies have a limit.
DETERMINANTS OF BOARD EVALUATION
: BOARD INFORMATION
• Regular and routine sources of
information
• Most boards develop a routine of set
of board reports: including the latest
financial accounts, cash flow report,
report on operations, market report, the
CEOs report on significant developments
etc.
 A good report should present:
Understandable , Reliable, Relevant,
Comprehensive, Concise ,Timely,
Cost-effective Data
 Where firms have adopted a
paperless approach (digitalise Data)
to communicate data they should
ensure : the confidentiality , security,
integrity, availability, cost-
effectiveness, flexibility, simplicity
and ease of use of data for all board
members

359
SPENCER STUART 2019 REPORT –
BOARD EVALUATION
 The vast majority of companies
comply with the UK Corporate
Governance Code recommendation
to conduct an annual board
evaluation and to utilise an external
facilitator at least once every three
years.
 Of the 150 companies in their
sample, 148 conducted an
evaluation in the past year. Only
Quilter14 and HSBC Holdings did not
conduct an evaluation during the
period covered by this Board Index.
 61.3% of boards conducted an
internal evaluation, and 37.3% of
boards in the top 150 companies
underwent an externally facilitated
review.
 Five companies also used an
external firm to assist with the
internal evaluation.
BOARD EVALUATION AND SUCCESSION
IN ITALIAN LISTED COMPANIES

360
  The percentage of companies
carrying out the annual self-
assessment on the size, composition
and functioning of the board and its
committees remains approximately
constant in 2020 (around 85% of the
total),
 The succession plan is adopted by an
increasing number of firms (almost
31% of the market from 26.5% in
2019)
BOARD RECRUITMENT/SUCCESSION
2018 UK Code of Corporate
Governance Principles J and K
(Similar to Italian Code)
10. Appointments to the board should
be subject to a formal, rigorous and
transparent procedure, and an
effective succession plan should be
maintained for board and senior
management. Both appointments
and succession plans should be
based on merit and objective criteria
and, within this context, should
promote diversity of gender, social
361
 and ethnic backgrounds, cognitive
and personal strengths.
11. The board and its committees
should have a combination of skills,
experience and knowledge.
Consideration should be given to the
length of service of the board as a
whole and membership regularly
refreshed.
BOARD APPOINTMENTS AND
SUCCESSION
2018 Code of Corporate Governance
Provisions 17-20 (Similar to Italian
Code)
17. The board should establish a
nomination committee to lead the
process for appointments, ensure
plans are in place for orderly
succession to both the board and
senior management positions, and
oversee the development of a
diverse pipeline for succession. A
majority of members of the
committee should be independent
non-executive directors. The chair of
362
 the board should not chair the
committee when it is dealing with
the appointment of their successor.
18. All directors should be subject to
annual re-election. The board should
set out in the papers accompanying
the resolutions to elect each director
the specific reasons why their
contribution is, and continues to be,
important to the company’s long-
term sustainable success.
BOARD APPOINTMENTS AND
SUCCESSION (2)
2018 Code of Corporate Governance
Provisions 17-20
19. The chair should not remain in
post beyond nine years from the
date of their first appointment to the
board. To facilitate effective
succession planning and the
development of a diverse board, this
period can be extended for a limited
time, particularly in those cases
where the chair was an existing non-
executive director on appointment. A
363
 clear explanation should be
provided.
20. Open advertising and/or an
external search consultancy should
generally be used for the
appointment of the chair and non-
executive directors. If an external
search consultancy is engaged it
should be identified in the annual
report alongside a statement about
any other connection it has with the
company or individual directors.
KNOWLEDGE AND SKILLS OF A
DIRECTOR
KNO WLEDGE SKILLS
 Company knowledge
 Business knowledge
• Accounting, finance, marketing,
operations, et al.
 Sector/industry knowledge
 International knowledge
 Economics knowledge
 Legal/regulatory knowledge

364
• Leadership
• Communication • Team-work
• Efficacy
• Creativity
NOMINATION COMMITTEE, BOARD
EVALUATION AND BOARD COMPOSITION
The annual report should describe the
work of the nomination committee,
including:
• the process used in relation to
appointments, its approach to
succession planning and how both
support developing a diverse pipeline;
• how the board evaluation has been
conducted, the nature and extent of an
external evaluator’s contact with the
board and individual directors, the
outcomes and actions taken, and how it
has or will influence board composition;
 the policy on diversity and inclusion,
its objectives and linkage to
company strategy, how it has been
implemented and progress on
achieving the objectives;
365
  and the gender balance of those in
the senior management and their
direct reports.
 Business elites and corporate
governance


 Business/corporate elites
 – Elites are seen in relation to the
holding and exercising power
(Savage&Williams, 2008)
 – Those who occupy the most
powerful positions in structures of
domination in corporate world (Scott,
2008).


 Business/corporate elites
 Dominant and most organised
stratum of capitalist class (Carroll,
2008):
 – A configuration of functioning
capitalists (major shareholders or
directors who are executives)
 – Organic intellectuals (directors who
are advisors to business owners and
top management -corporate lawyers,
financial advisors, etc-and who often
sit multiple boards, occupying
366
 ultimate authority positions within
leading corporations


 About Corporate Governance

 “CG involves a set of relationships
between a company’s management,
its board, its shareholders and other
stakeholders. CG also provides the
structure through which the
objectives of the company are set
and the means of attaining these
objectives and monitoring are
determined” (OECD, 2015:9)


 About Corporate Governance

 Main principles: equitable treatment,
responsibility, transparency and
accountability.


 Missing Perspective in Corporate

Governance
 Lack of holistic explanations of
interrelated social and economic
systems and identification of
interrelations between layers of
governance (Clarke, 2017).

367
Multi-layered nature of governance
• The global level-identification of global
problems for the global agenda- flow of
investment at a global scale by
multinationals
 The institutional level-perception of
and solutions presented by
institutions like the OECD and
governments in relation to
governance
 The organisational level-NGOs and
corporations' responses to the issues
of governance
 The managerial level-managerial
perceptions on governance (Clarke,
2004)

Interlocking directors
 The origins of ties are rather social
than strategic (Davis,et al, 2003)
 Domination of relatively small
number of large companies linked

368
 through inclusive and diffusely
structured networks (Useem, 1984)


 Interlocking directors
 The configurations of the aggregate
networks are not formed by
conscious design (or a central
authority) but by the efforts of the
individual businesses seeking to
recruit well connected directors
(short social distances) that
enhances the business (Davis et al.,
2003)

Ascendance of director influence

(Useem, 2015)

369
• Greater emphasis on business
background, less on monitoring
experience
• Focus on how boards are organised
and how directors work with the
executives
• Alliance between investors, directors
and executives?

Transnational elites
 Transnational informal network with
global coherence (Sklair, 2000;
Carroll, 2010)
 World Economic Forum-Annual
Meeting in Davos with over 2500
participants (mainly executives and
directors of largest firms
• [Link]
• [Link]

Elites in governance

370
• Multidisciplinary studies on business
elites to better understand the power
distribution
• Business elites’ perception and
practices of governance seem to lead to
both a democracy deficit and
governance deficit.

Elites in governance– The reality of the

boardroom
 Corporate governance is more about
human behaviour than structures
and rules, and regulations.
 Corporate governance involves the
use of power. It is a political process.

The reality of the boardroom

People, power and politics affect
practice
Some authorities assume that:
 – Directors behave rationally

371
  – Board level discussions are
analytical
 – Decisions are reached after a
careful consideration of alternatives
Experience of governing bodies,
suggests that directors’ behaviour is:
 – Influenced by inter-personal
relationships
 – Affected by perceptions of position
and prestige
 – Involves the processes of power
 – Can be inter-personally political
Power, Corporate Governance, and
Boards
Analytical traditions (Pettigrew &
McNulty 1998):
 – Managerial hegemony perspective
(Mace 1971) – boards are ‘rubber
stamps’, ‘lights on the corporate
Christmas tree’, power lies with CEO
and management
 –
Agencytheory(Jensen&Meckling1976)

372
 :boardsneedpowertocurb managerial
excesses
– Elite theory (class hegemony
theory) (Useem 1980 & 1982) social
elites manifested in and promulgated
by boards (and interlocking
directorates)
Jj

373
 The Division of Responsibilities
(UK Corporate Governance Code,
2018)
F. The chair leads the board and is
responsible for its overall
effectiveness in directing the
company. They should demonstrate
objective judgement throughout their
tenure and promote a
374
 culture of openness and debate. In
addition, the chair facilitates
constructive board relations and
the effective contribution of all non-
executive directors, and ensures that
directors receive
accurate, timely and clear
information.
G. The board should include an
appropriate combination of executive
and non-executive (and, in
particular, independent non-
executive) directors, such that no
one individual or small group of
individuals dominates the board's
decision-making. There should be a
clear division of
responsibilities between the
leadership of the board and the
executive leadership of the
company's business.
H. Non-executive directors should
have sufficient time to meet their
board responsibilities. They
should provide constructive
challenge, strategic guidance, offer
specialist advice and hold
375
 management to account.
I. The board, supported by the
company secretary, should ensure
that it has the policies, processes,
information, time and resources it
needs in order to function effectively
and efficiently.
Board Chair Independence?
(Provision 9 of CG Code)
"The chair should be independent on
appointment when assessed
A
against the circumstances set out in
Provision [Link] roles of chair
and chief executive should not be
exercised by the same individual.
A chief executive should not become
chair of the same company.
If, exceptionally, this is proposed by
the board, major shareholders
should be consulted ahead of
appointment. The board should set
out its reasons to all shareholders at
the time of the appointment and
also publish these on the company
website." (FRC CG Code, 2018: 6)
376
 Functions of a board chairperson
(Trickr, 20 | 5)
1)Leadership of the board
2)Management of meetings
3)Strategic leadership
4) Linking the board with
management
5)Arbitration between board
members and others
6)Being the public face of
thecompany

Types of
Chairpersons
Furr & Furr (2005) in Huse
(2007) categorised chairs as
follows:
-The pliant chair
•The 'my way' chair
• The 'in the weeds' detail chair
• The 'no ability or interest' chair
• The self-serving chair
-The procrastinating chair01:05

377
 The Role of Non-Executive Directors
To help develop proposals on
strategy
To scrutinise the performance of
management in meeting agreed
goals and objectives
To monitor the reporting of
performance.
To satisfy themselves on the
integrity of financial information and
that
financial controls and systems of risk
management are robust and
defensible.
They are responsible for determining
appropriate levels of
remuneration of executive directors
They have a prime role in appointing
and, where necessary, removing
executive director (s).
To appoint one of the non-executive
directors as senior independent
director.

378
Non-Executive Directors
The chairman should hold meetings
with the non-executive directors
without the executives present led
by the senior independent director.
• If directors have concerns which
cannot be resolved about the
running of the company or a
proposed action, they should
ensure that their concerns are
recorded in the board minutes.01:06

The Role of the Senior Independent

Director
1) The board should appoint one of
the independent non-
executive directors to be the senior
independent director
to provide a sounding board for the
chair and serve as an
intermediary for the other directors
and shareholders.
2) Led by the senior independent
director, the non-executive
directors should meet without the
chair present at least
379
 annually to appraise the chair's
performance, and on other
occasions, as necessary.
3) The senior independent director
should be available to
shareholders if they have concerns
which the chief
executive or other executive
directors have failed to
resolve.
4) To take over as Chair of the Board
in the absence of the
chairperson.

380
Board Composition and diversity

381
Potential Advantages and
Disadvantages of Board Diversity

ADVANTAGES
Provides multiple perspectives
Increases level of information
Diverse range of knowledge and
skills
Lower levels of groupthink
Greater levels of creativity and
innovation

DISADVANTAGES
Emotional/affective/relationship
conflict
Poor communication
Issues with group cohesiveness
Issues with trust

Women directors in Italian Boards

(Consob, 2021)

382
Women representation on corporate
boards of listed companies has reached
an all-time high in the Italian market
(41% of appointments), as a result of
the rules on gender quota (Law no.
120/2011 and Law no. 160/2019) at the
end of 2021,
The boards of the 131 companies that
have applied the two-fifths gender quota
envisaged by the Law no. 160/2019
count on average 4 women (almost 44%
of the total members), while in the
remaining firms the female presence is
only marginally lower.
The number of cases in which women
hold the role of CEO or chairman of the
board of directors remains limited, while
the role of independent director is more
widespread.
Women hold more than one directorship
(interlocker) in 30% of cases, a figure
that is down from the previous year and
the maximum reached in 2019 (34.9%).

383
Women directors in Italian Boards
(Consob, 2021)
Overall, women hold on average 4 board
seats, with larger and financial firms
displaying higher records women
directorships.
Data on the role exerted by women is in
line with long-standing evidence.
Women serve as the company’s CEO in
16 companies (2.4% of total market
value) and chair the board of directors
in 30 companies (representing 21% of
total market capitalisation).
Tree women out of four (74.5%) serve
as an independent director (in line with
the previous five years), while the
number of women appointed by
minority shareholders through the slate
voting system has risen up to 91
directors in 71 large companies,
accounting for 73% of total market
value (from 84 women in 67 firms in
2019)
Finally, in line with previous evidence
women are more often than men
384
interlockers (30% of women, as opposed
to 22% of interlockers in the directors’
population). However, data show a
decrease in women interlocking as
compared to the peak reached in 2019
(34.9%) after the upward trend recorded
over 2013-2018 .
The evolution of
diversity in
Italian Boards (Consob, 2021)
The evolution over time of the diversity
of corporate boards also reflects the
increase in the presence of women, due
to the application of the provisions on
gender quotas. As for the boards of
directors, the average age of female
directors has gradually increased over
time, from less than 50 years in 2011 to
around 54 in 2020, although it remains
lower than the average age of male
directors; this fact contributed to slightly
lowering the overall average age.
Over the same period, the proportion of
women graduates has increased
385
significantly, from about 76% to 93%;
compared to a substantially unchanged
number for the male directors. The
female increased the total share of
graduate directors by more than 5
percentage points to 89%.
Another significant effect concerns the
professional profile, with the share of
managers dropping by almost ten
percentage points, from 75% in 2011,
compared with the contraction of female
manager from 72% to 48%. The impact
of gender quotas on the diversity of the
boards of statutory auditors’ members
is, however, less marked

Board characteristics of Italian Listed

Firms (Consob,2021)
The attributes of the members of the
boards of directors of Italian listed
companies result from the analysis of

386
2,138 offices, referring to 218
companies as of the end of 2020.
lthough the prevailing professional
profile is managerial, the directors of
financial, larger and public firms are
more academic than average.
Directors are aged on average 57 years,
are foreigners in 5.5% of the cases,
family director (either a family member
of the controlling shareholder or the
controlling shareholder) in 16% of the
cases, hold a first degree in more than
89% of the cases and have a managerial
background in about 66% of the cases.
Members’ attributes also depend on the
industrial sector, the company size and
the identity of the ‘ultimate controlling
agent’ (UCA). As in 2019, directors of
the Ftse Mib firms and of the companies
controlled by financial institutions in
2020 are more frequently graduates and
foreigners. A
Directors in the service sector and in
public companies are younger (55 years
old on average). The proportion of
387
family directors, at around 26% in
family- controlled companies, occurs
more frequently in industrial sector.
Statutory auditors are aged on average
56 years, are foreigners in less than 1%
of the cases, hold a first degree in 96%
of the cases (mainly in Economics) and
are predominantly a
consultant/professional (85%).

New Non-Executive Directors

388
The Parker Review
•[Link]
parker-review-recommendations-to-
increase-the-representation-of-
under-represented-groups-and-ours/
• The Parker Review was commissioned
in 2017 to report and make
389
recommendations on the
representation of ethnic minorities in UK
boardrooms.
The 2020 update report says that
progress has been slow. In 2020, 37% of
FTSE 100 boards have no
BAME representation on their boards,
down from 50% in [Link] 250
boards are even less diverse
than FTSE 100 boards with 69% of
respondents with no ethnic
representation in their boardroom. Of
note, the Review uses two definitions:
directors of colour or directors of white
European heritage.
• Across the FTSE 350, there are 2,37 I
director positions for which ethnicity
categorisation is known (90%
of the total 2,625 director positions).
Black, Asian and other ethnic minorities
held 178 of the positions,
representing 7.5% of positions (6.8% of
total positions)
Finally, there is a concentration of
directors of ethnic minorities in a small
number of companies with 8

390
companies accounting for nearly 25% of
BAME directors01:13

Board Diversity Literature 1 -

Benefits of Women on Boards
(Samara et al, 2019)
• Increased gender diversity in the
boardroom leads to a better
understanding of stakeholder needs
(mainly customers and employees),
enabling firms to enter new markets,
to serve diverse customer
segments, and to increase employee
satisfaction at work (Campbell &
Minguez-Vera, 2008;
Robinson & Dechant, | 997).
• The presence of women on boards
can enhance creativity and
innovation in the boardroom as
these characteristics vary with
respect to demographic
characteristics such as gender
(Robinson &
Dechant, 1997).
Considering women to be appointed
391
 on boards increases the pool of
talent from which directors
are selected (Campbell & Minguez-
Vera, 2008), which can improve the
board's monitoring ability
(Carter, Simkins, & Simpson, 2003;
Pucheta-Martinez, Bel-Oms, & Olcina-
Sempere, 20 | 6)
• Having women in the boardroom
improves the company's image,
which in turn generates
favourable consumer attitudes
toward the firm (Smith, Smith, &
Verner, 2006).
Board Diversity Literature 1 - Women
on Boards
• There is a significant amount and
still increasing body of research that
studies the impact
of women in the boardroom.
• The studies examine the impact of
women on firm performance, (Dezso
& Ross, 2012),
firm value (Ahern & Dittmar, 20 1 2),
market value (Hassan et al., 20 | 6),
risk-taking (Faccio
392
 et al., 20| 6; Gulamhussen & Santa,
20 1 5, Veltri et al., 202 1), earnings
management (Arun pt
al., 20 | 6), corporate social
performance (Byron & Post, 20|6);
Board Decisions - dividend
pay-out (Chen et al., 20|7); mergers
& acquisitions (Levi et al., 20 | 3);
CSR/environmental
sustainable policies (McGuinness et
al., 20 | 7; Atif et al. 2020)
• The results are mixed, although
there is some evidence that there is
a need for a critical
mass of women on the board (a
minimum of 2/3 women on the
board) for the outcomes
to be beneficial

Board Diversity Literature 2 - Age

Diversity
• There are fewer studies of age
diversity in the boardroom. The
results are mixed.
• A number of studies find that older
executives are less likely to initiate
393
 changes (cf. Bantel &
Jackson, 1989;Wiersema & Bantel,
1992) and that younger boards are
associated with greater
strategic change (Ahn & Walker,
2007).
• Alternatively, Golden and Zajac
(200 1) find that the percentage of
directors over age 50 is
positively related to strategic change
while Platt and Platt (2012) find that
the average age of
directors in firms that succumb to
bankruptcy is significantly lower than
in firms that do not,
suggesting that older directors have
valuable experience.
• Some view director age as a
double-edged sword, indicating
valuable experience but also higher
risk aversion (Katz, 1982; Miller, |99
|; Platt & Platt, 20 | 2).
• Others suggest that average age
alone is not a useful measure. For
instance, Kim and Lim (2010)
find that greater age diversity is

394
 associated with higher firm value
measured as Tobin's Q

Board Diversity Literature 3 -

Potential Benefits of
International Board Members
• Improve quality of board decisions
through knowledge of different
markets, regulations, etc.
• Knowledge of the firm's industry or
business trends from an international
parspective.
• Knowledge of corporate
governance standards in their own
country.

Board Diversity Literature 3 -

Nationality
• Foreign independent directors are
more likely to be associated with
firms that have more foreign
operations
and an international shareholder
base, than firms that are located in
countries with a limited supply of
395
 potentially qualified domestic
directors - countries with a smaller,
less well-educated populace and
lower
levels of capital market development
(Miletkov et al., 20 | 6)
• The association between foreign
independent directors and firm
performance is more positive in
countries
with weaker legal institutions and
when the director comes from a
country with stronger legal
institutions
than the firm's host country
(Miletkov et al., 20 1 6).
• Boards containing diverse
nationalities are positively and
significantly associated with
shareholder
heterogeneity and the firm's
international market operations
(Estelyi and Nisar, 20 1 6).
• Nationality diversity is also
positively related to operating
performance (Estelyi and Nisat, 201
6)
396
 • Institutions relating to investor
engagement play an important role
in influencing the nature and
consequences
of board diversity (Estelyi and Nisar,
20 1 6).

Board Diversity Literature 4 -

Ethnicity
• Very few studies on ethnic diversity
in the boardroom, partly because
there is little
ethnic representation (there is some,
but low growth) in boardrooms
(although
ethnicity and minorities has different
meanings in different countries
• Research suggests that ethnic
representation contributes to
creativity, ethical behaviour
(Macfarlane et al., 2010) and
internationalisation (Wang and Cliff,
2009).
• Carter et al. (2003) find that boards
with greater ethnic diversity
enhances firm value
397
 • Upadhay and Zeng (20 | 4) find
that board diversity (gender and
ethnicity) not only
impacts the quality of firm-specific
information generated by managers
but also impacts
the information collection and
dissemination process by important
information
intermediaries such as analysts.

Board Diversity Literature 4 - Various

Board specific skills and board
cultural diversity have a negative
effect on corporate risk, while
board tenure does not affect it
(Gallego-Ivarez, 2022; Bernile, et al.,
2018)
Diverse boards improve the quality
of a firm's decision-making while
simultaneously influencing
corporate risk (Makkonen et al.,
2018)
• Board diversity, such as education,
experience, and skills, are
comparatively more influential in
398
 alleviating corporate risk as
compared to diversity in terms of
gender and age (Bhat et al.,
2002).
Board structural diversity positively
affect corporate social performance
and gender diversity
has no effect on CSP in large Italian
firms (Veltri et al., 202 1).
• Increasing female diversity and
foreign culture representation on the
board can effectively
reduce greenhouse gas emissions
(Farhidi, et al., 2022).

399
400