Setting Your Own Standards: Internal Corporate Governance Codes as a Response to Institutional Pressure

Authors:
Ilya Okhmatovskiy;Robert J. David
Affiliations:
Desautels Faculty of Management, McGill University, Montreal, Quebec H3A 1G5, Canada;Desautels Faculty of Management, McGill University, Montreal, Quebec H3A 1G5, Canada
Venue:
Organization Science
Year:
2012

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Abstract

This paper is concerned with organizational response to institutional pressure. We argue that when faced with externally imposed standards, organizations can sometimes respond by developing alternative standards for the same practices. This “substitution response” can shift the attention of stakeholders away from noncompliance with the original standards to adherence to the alternative standards. Empirically, we examine organizational response to the introduction of a government-sponsored but nonmandatory corporate governance code. Unable to comply with all of the requirements of this very specific and demanding code, many firms responded by developing their own internal corporate governance codes. We predict and show that adoption of these internal codes is driven by the visibility of a firm's corporate governance practices and by mimetic forces. We also find that internal governance codes differ in their degree of ceremoniality and that ceremoniality is inversely related to organizational dependence on stakeholders who value good corporate governance. These findings help us to understand when organizational responses to institutional pressure take a ceremonial as opposed to substantive form.