key identifiers of corporate governance maturity: a ... · adizes (1979) defines a prime...

Ruth Massie Corporate Governance Maturity

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Key Identifiers of Corporate Governance Maturity: A Literature Review

1 Introduction

Filatotchev et al (2006) identify that organisations require, and focus on, differing aspects of

corporate governance as they evolve. For example, as organisations progress from founder-

owned through to Decline the focus on strategy decreases; conversely the focus on

monitoring increases. Additionally, Daily and Dalton (1997) postulate that the separation of

Chair and CEO may be of value within a declining organisation yet the value of separation is

inconclusive at other stages of an organisation’s lifecycle.

Academics and practitioners often use the terms “good”, “bad” and “best practise” to

describe aspects of, or approaches to, corporate governance (e.g. Turnbill, 2010).

Schumpeter (2010) identified that good corporate governance is wider than a set of ideal,

and reportable, actions and that it should also address intangible aspects such as culture.

Donker & Zahir (2008:92) identify corporate governance is a “complex and dynamic issue as

it deals with cultural, political, technological and market variations”. As such, it is not just the

reportable activities that are key to effective corporate governance but the actions and

activities undertaken in relation to the organisation itself: its culture, industry and lifecycle

stage (Gedajlovic et al, 2004). Therefore, it is the maturity of the corporate governance

processes within the organisation, in relation to its lifecycle stage, that needs to be identified

to enable evaluation of the quality of the corporate governance.

In 2009 the King III corporate governance code was issued in South Africa (Institute of

Directors Southern Africa [IODSA], 2009). The code is applicable to “all entities regardless of

the manner and form of incorporation” (IODSA, 2009:18), and is the first code applicable to

such a breadth of organisational entities. The code takes no account of whether the

organisation is for or not for profit, or, if it is a new or an established organisation. Shortly

after the code’s issuance, Deloitte’s, one of the world’s top four consulting firms, launched a

“King III Maturity Dashboard” (Deloitte & Touche, 2010) service that enabled organisations to

assess their corporate governance maturity in comparison with the King III

recommendations. As such, Deloitte’s have turned the code’s “recommended practise”

(IODSA, 2009) into a quantitative model of corporate governance maturity (Deloitte &

Touche, 2010). Whilst this provides an excellent tool for organisations to evaluate their


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corporate governance, does mere compliance with a code of corporate governance truly

define corporate governance maturity?

Maturity within the corporate governance field is a complex issue for which, like corporate

governance in general, there is no common defined structure. Corporate governance

maturity is a term found in the so called “grey literature”, such as practitioner journals and

newspapers (e.g. Ray, 2007; McCormick, 2011; Economist Intelligence Unit, 2011), though it

is common for them to incorporate corporate governance within an overall governance, risk

and compliance (GRC) maturity discussion. In contrast, within the academic literature little

focus has been given to the topic of corporate governance maturity.

Given the complex nature of corporate governance, the majority of academic research

papers have refined their scope, or sample population, to review an issue in relation to a

point in the organisation’s lifecycle. Filatotchev et al (2006) identify that the majority of

research is undertaken with mature organisations as the focal lens and that the majority of

regulations are also designed from this view point. Their research identifies that the

corporate governance activities varies as the organisation evolves, for example the balance

of organisational focus on strategy, resources and monitoring functions vary in a predictable

pattern over the life of the organisation. Additionally, numerous books, book chapters and

articles have been written about the corporate governance lifecycle (e.g. Filatotchev, 2010;

Filatotchev & Wright, 2005). Therefore, although it can be argued that maturity is a well

recognised phenomenon within corporate governance research, it is also possible to identify

key markers of corporate governance in relation to each lifecycle stage from the literature. It

may then be possible to identify when corporate governance is mature in relation to the

lifecycle phase the organisation inhabits.

This paper aims to identify key markers of corporate governance by lifecycle phase through

a review of the current literature. Organisational studies literature will be used as a

framework, through which analysis of the corporate governance literature will be carried out.

This will facilitate the identification and development of maturity markers. Subsequently

these markers will be used to identify areas of future research from which a clear, applicable,

definition of corporate governance maturity can be indentified and potentially be used for

future investigation of areas such as regulation development.


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2 Background

2.1 Maturity

In order to construct a definition of mature corporate governance, first the concept of

maturity needs to be defined. It is worth noting that,

“Across disciplines and across time, the concept of maturity has been the

subject of much theory and research. Biologists, sociologists, and

psychologists have asked: What does it mean to be mature (Greenberger

& Sørensenm 1974)?” (in Galambos et al, 2003)

Kiefer (1988:8), a noted psychologist, identifies that maturity is a social construct that varies

from place to place as well as across eras, that is to say it is situational. She goes on to

identify that:

“Maturity requires honesty and clarity about the limitations of our own

understanding… not only to minimize self-delusion, but to maximize the

effectiveness of our value choices” (Keifer, 1988:90)

Whilst, in their conclusion Filatotchev et al (2006) reject the “notion of a universal

governance template”, Bourne (2009) highlights that the concept of organisational maturity

was developed to enable organisations to benchmark against a standard. Within corporate

governance, regulations have intrinsically been used to define this benchmark, however, as

the following literature review identifies, organisations evolve and change over time

(Filatotchev et al, 2006; Quinn and Cameron, 1983).

2.2 Organisational Lifecycle Overview

Organisation scholars use the analogy of a lifecycle to illustrate changes within an

organisation over its lifespan. Though, organisational studies literature acknowledges that

this analogy is not perfect; organisations can, for example, reawaken and disappear

(Kimberly & Miles, 1980:ix). There have been a number of lifecycle models suggested: each

with a variety of phases, labels and definitions which have been developed from differing

focuses. Quinn and Cameron (1983) reviewed nine of the significant lifecycle models and

identified that each model had four stages: an entrepreneurial stage, a collectivity stage, a

formation and control stage, and a structure elaboration and adaption stage. A model

developed by Adizes (1979) additionally has a Decline stage. In general the stages, or


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phases, can be labelled as: Birth, Growth, Maturity (Prime), Revival and Decline (Miller &

Friesen, 1984).

For the purposes of this paper the term "Prime" will be used for ease of clarity to describe

organisations that are in the stage that would classically be referred to as "Mature" to

distinguish them from the concept of mature corporate governance. By separating the

concept of a Prime organisation and that of an organisation that has mature corporate

governance discussion of, for example, immature corporate governance processes within a

"Mature", or "Prime", organisation is facilitated. Additionally, the unit of analysis for this

research is the firm level not the industry level; as such it is possible to have a Growth phase

organisation within a mature industry.

Organisations are formed from many different starting points; for example individual

entrepreneurs, spin off companies and new government departments. The initial stage, Birth,

is characterised by the need for legitimacy (Quinn & Cameron, 1983) with an aim to gain

sufficient resources to survive (Quinn & Cameron, 1983). Leadership within this phase is

usually dominated by the founder and little formal structure exists. (Miller & Friesen, 1984)

The Growth stage is characterised by innovation and reaction, with an emphasis on

customer delivery. The leadership of the organisation is usually transferred from the

founding entrepreneur to a more formalised management structure (Miller & Friesen, 1984).

The management’s focus moves from operational issues to strategic issues (Daft, 2004).

The Prime stage is often characterised by bureaucracy in the form of operational rules and

regulations, HR processes and reward structures. Innovation is reduced and stabilisation in

sales is seen (Miller & Friesen, 1984). Adizes (1979) defines a Prime organisation as a

results orientated organisation with institutionalised systems. Miller & Friesen (1984) identify

this stage as being conservative in nature.

Organisations can remain in the Prime phase for a prolonged period of time, though in many

cases the changes in the organisation, or its environment, force it to enter the Revival stage.

During this phase the organisational goals become focused on diversification (Quinn &

Cameron, 1983). There is also often a streamlining in the “red-tape” of the bureaucracy

(Daft, 2004:327) to increase the organisation’s efficiency. Organisations in this stage often

adopt a more divisional based structure (Miller & Friesen, 1984).


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The final stage, Decline, is often excluded from lifecycle models (Drazin & Kazanjian, 1990).

The Decline phase is reached when the market for the products decline, there is a lack of

innovation and the profits decline (Miller & Friesen, 1984). Miller and Friesen identify that the

decision making style is that of “extreme conservatism” (1984:1175). Miller and Friesen

(1984:1166) summarised these phases by using the following criteria for lifecycle phases in

their own analysis:

Phase Criteria Birth Firm is less than 10 years old, has informal

structure and is dominated by owner-manager Growth Sales growth greater than 15%, functionally

organized structure, earl formalization of policies Maturity [Prime]

Sales growth less than 15%, more bureaucratic organization

Revival Sales growth greater than 15%, diversification of product lines, divisionalization, use of sophisticated controls and planning systems

Decline Demand for products levels off, low rate of product innovation, profitability starts to drop off

Figure 1 – Lifecycle Criteria (Miller & Friesen, 1 984:1166)

These definitions are problematic at best, as much of the literature uses differing values and

time frames to delimitate between each of the phases (Phelps et al, 2007). Lippitt and

Schmitt (1967, quoted in Quinn & Cameron, 1983) propose that age and phase are only

dimly correlational. Additionally, the methodology sections within empirical research articles

do not always clearly state all of their sample parameters, therefore, making a meta-review

of the literature a complex process.

Within Quinn & Cameron’s (1983) comparison of nine organisational lifecycle models, none

of the models mention diffused share ownership as a requirement for entering the Prime

lifecycle phase. It is worth highlighting that within the USA the top 20 private companies

have joint revenue of $550.75 billion and employ over 1.5 million people (Forbes, 2011). The

companies on this list include well known organisations such as Mars, Ernst & Young and

Fidelity Investments, the former two being over 100 years and the latter over 60 years since

their inception. La Porta et al (1999, in Mallin, 2010:83) identified that, in a sample of large

firms in 27 countries, 35% of companies are family-controlled. The size, and quantity, of

private organisations is material with regards to the world’s economy. It is important to note

that these organisations, like public listed organisations, also have significant internal

governance structures.


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Miller and Friesen (1984) identified that, whilst the tendency is for organisations to progress

through each stage in a linear fashion from Birth to Decline, it is also possible for

organisations to revert, for example, from Revival back to Prime, as happened within 23% of

their sample, though they acknowledge the limitations of their own purposeful sampling

methodology in effecting this result. Also, the Decline phase can be reached from any of the

previous stages. Additionally, some organisations may not wish to proceed along the

lifecycle but prefer to stay as small businesses, this is more common in family owned

companies (Huse 2007:119).

Greiner identifies that between each of stages organisations undertake a “period of

revolution” (1998:56) during which the management practices within an organisation are

found to no longer be appropriate and are abandoned for new practices to facilitate the next

phase. Greiner (1998:57) goes on to note that:

“Those new practices eventually sow the seeds of their own decay and

lead to another period of revolution. Managers, therefore experience

the irony of seeing a major solution in one period become a major

problem in a later period”

As with other aspects of lifecycle research there a number of definitions and crises identified.

For the purpose of this research, the following generalised crises will be used:

• The requirement for a management structure – between Birth and Growth

• The need for formalised delegation of authority – between Growth and Maturity

• The negative impact of red tape – between Maturity and Revival

As identified above, organisations’ can enter decline from any phase as such any of the

crises can precede it. Hall (1987:202) points out that Ecological Theory identifies that an

organisation’s survival is based on their ability to adapt to their environment and that the

environment selects which organisations will survive. In support of this concept, Filatotchev

and Toms (2006) identify that governance structures themselves may inhibit an

organisation’s ability to grow and develop.

Miller and Friesen (1984) identify that at each lifecycle phase there are distinct attributes in

relation to an organisation’s focus upon which they based their own analysis of 54 variables,

listed in Appendix 6.2. Whilst there are other aspects that have been researched in relation

to organisational lifecycle, Miller and Friesen’s research is one of the few longitudinal studies

on the issue (Drazin & Kazanjian, 1990). Their model also provides a comprehensive

definition of each of the aspects they analysed. They classify them into; situation, structure,

decision making style and strategy. In summary, these aspects look at;


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• Situation; concentration of ownership, customer influence, Board influence,

shareholder influence and the competition environment

• Structure; information management, informal/formal controls, delegation of authority,

planning activities and communication processes

• Decision making style; level of analysis, number of inputs to decisions, decision

integration across organisations and risk management

• Strategy; from offensive and innovative through to defensive (Miller and Friesen,

1984)

Miller and Friesen (1984:1164) identified that there are five key aspects that change within

the situation category:

“Firms will be getting larger during the first four phases. The influence of customers

on decisions will grow, and that of the Board and of shareholders will diminish.

Finally, the environment will be increasing in heterogeneity and hostility”

In the transition from Birth to Prime the organisational structure will become “increasingly

sophisticated” (Miller & Friesen, 1984:1164). There will be “more information processing

procedures…decentralization of authority… [and] departments will become more

differentiated” (Miller & Friesen, 1984:1164). However, in the Decline phase the structural

sophistication will reduce and “tends to be too primitive to allow effective adaption” (Miller &

Friesen, 1984:1164).

According to Miller and Friesen’s (1984) classifications, during the first four phases the

complexity within the organisation increases. This creates more inputs to the decision

making process, an increase in analysis and more integration of decisions across the

organisation (Miller & Friesen, 1984:1164). In the Birth, Growth and Revival phases there

would be greater focus on innovation, risk-taking and adaptiveness than the more

conservative Prime and Decline phases (Miller & Friesen, 1984).

Miller and Friesen (1984:1164) identify that:

“Attempts to renew strategies or innovate will predominate during Birth,

Growth and Revival phases, while the emphasis will shift to capitalizing

on efficiency during the Maturity [Prime] and Decline phases”

During Birth, Growth and Revival stages the strategies are more likely to focus on

“innovations, diversification, and vertical integration”, conversely, during Prime and Decline


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they are more likely to focus on “price-cutting, imitation, lobbying, collusion and advertising”

(Miller & Friesen, 1984:1164).

In summary, the organisational lifecycle literature identifies that there are changes within an

organisation as it evolves. These changes are both wide ranging and different as the

organisation progress along, and between, the lifecycle phases. Each of the phases has a

unique set of characteristics that can be identified, though the classification of them may

vary across studies. These differences can also be seen within the corporate governance

literature, as the following section illustrates.

2.3 Corporate Governance

There are over 329 Corporate Governance codes listed worldwide (European Institute for

Corporate Governance, 2011), which is an increase from 264 in October 2009 (Rasmussen,

2010:4). Many of these codes are focused on mature organisations, for example the

Financial Reporting Council’s (FRC) The UK Corporate Governance Code (2010) applies to

organisations with premium listings and excuses companies outside of the FTSE350 from

meeting certain criteria. The codes all cover variety of aspects and common too many of

them are:

• The role of the Board

• The Board and subcommittee structures

• The leadership of the Board including ethics

• The membership of the Board and the independence of (some) Directors

• Expected behaviours of Board members

• Remuneration of Board Members

• The information requirements of the Board members

• Relationship with stakeholders

• Risk management

• Compliance and reporting

Whilst these codes do not define corporate governance maturity, per se, they provide

expectations of the expected level of achievement in relation to corporate governance within

an organisation. Many of the codes are based on a “comply or explain” basis, where

organisations who do not meet the codes requirements are required to provide an

explanation as to why not.

As noted above, the King III corporate governance code is applicable to all organisational

types (IODSA, 2009:18) and, as such, it is immaterial whether the organisation is listed or


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not, for or not for profit. It is worth noting that this is the exception, not the rule with regards

to regulatory codes. On the other hand, in the King III code the authors do acknowledge that

“corporate governance principles and practices are dynamic and evolve” (IODSA, 2009:19).

A number of ratings organisations have attempted to define the quality of the corporate

governance within an organisation using a significant number of factors (Ray, 2007). Rating

agencies look at, for example; ownership structures, take over practises and shareholder

rights (Allen et al, 2004 in Donker & Zahir, 2008). It is worth noting that the resulting ratings

have been subject to critical discussion. Research has identified that there is little, if any, link

between the ratings and the performance of the organisation (Daines et al, 2010; Donker &

Zahir, 2008). In contrast, Dallas (2004 cited in Renders et al, 2010) and Dallas & Patel (2004

cited in Renders et al, 2010) argue that despite the complexity and quantity of information

corporate governance ratings are still “valid indicators of good or bad governance”. Daines et

al (2010), though, identifies that most of the ratings are unable to predict future

organisational performance.

As there are a significant number of aspects attributed to corporate governance, two sources

were reviewed to identify corporate governance topic areas; Corporate Governance: An

International Review (CG:IR) journal and The British Academy of Management (BAM)

Annual Conference. These two were chosen as they both represent major contributors to the

field of academic research, the former focuses on corporate governance and the latter on

the wider management field.

Over the last five years (2007-2011) the BAM Conference has hosted a number of

presentations in corporate governance related topics. The presented papers with titles that

were either within the corporate governance stream (2010 and 2011 only) or contained

“Governance” or “Board” in the title where codified. In addition, the keywords and abstracts

of two years worth (2010-2011) of papers published in CG:IR was also reviewed. The topics

researched were then cross referenced with Miller & Friesen’s four areas using their

descriptors, variable listed in Appendix 6.2:


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Situation Strategy Board Power Board's influence Ratings Delisting Processes Accounting Standards Activism - external Community Relations Geography/Location Principles Regulations Tax regimes

Activism - shareholder Corporation Structure Family ownership Investment Joint Ventures Partnerships Reputation Shareholders Stakeholders Takeovers Voting rights

Corporate Social Responsibility Financial Performance Acquisition Financing Reputation Management Legitimacy Financial Vehicles Labour Relations Restructuring

Board’s Role in relation to Company Performance

Decision Making Style Structure Risk Management Processes Risk Management Board Agenda CEO/Chair Duality Decision Making Processes Gender

Leadership Minorities Board Norms Codes of Conduct Crisis Management Power

Board Structure Board Sub-committees Board Mechanisms Transparency Organisational Demography Knowledge Management Governance Structures Non-Executive Directors/ Independent Directors Role

Uncategorised Agency Theory Institutional Theory Requirement for a global

Corporate Governance Theory

Resource Dependency Theory Social Categorization Theory Stewardship theory Cost of

Independent Directors E-Governance

Agency costs CEO/Board Pay Financial Discipline Pay - non Board Level Responsibility

Figure 2 – Corporate Governance Research Analysis

As can be seen above, there is a defined overlap between the lifecycle attributes and the

topics of research within corporate governance. However, given the large number of

variables, as identified within the table above, is it possible to identify a smaller number of

key variables that can indicate corporate governance maturity within each of the lifecycle

stages?

3 Corporate Governance Lifecycle

3.1 Lifecycle Models

In Clark’s (2007:8) chapter on governance lifecycles, he illustrates the governance changes

over the organisations lifecycle by comparing the ownership structure with the governance

challenges:


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Figure 3 - Corporate Governance Lifecycle, Clark 20 07:8

Clark (2008:7) identifies that the corporate governance focus shifts in relation to the

ownership structure of the organisation. He identifies that the development of the

owner/manager separation dichotomy begins, and increases, as the original shareholders’

proportional stake decreases, through the selling of shares.

Filatotchev et al (2006) is one of the most comprehensive reviews of the entire lifecycle in

relation to corporate governance. Their research also identified that each phase of the

lifecycle has a different balance of focus. They identify that the focus on monitoring,

resources and strategy changes over the life span of the organisation. Their paper focuses

on the evolution from one lifecycle phase to the next and the overcoming of thresholds. They

conclude that the process of transitioning from one phase to the next is potentially important

in determining the success of the organisation.

Governance ObjectivesStrategicEnvironment

Wealth Creation Wealth Protection

High “Velocity”

Quadrant1Founder/IPO Threshold

Governance Functions:• Monitoring: Low•Resource: High•Strategy: High

Quadrant 2IPO/maturity threshold

Governance Functions:• Monitoring: Medium •Resource: Medium •Strategy: Medium

Low“Velocity”

Quadrant4“Re-invention” Threshold

Governance Functions:• Monitoring: Low•Resource: Medium•Strategy: Medium

Quadrant3Maturity/decline Threshold

Governance Functions:• Monitoring: High•Resource: Low•Strategy: Low

Figure 4 - Corporate Governance Lifecycle, Filatotc hev et al, 2006


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It is important to note that Clark’s (2008:8) diagram, Figure 3, infers that only public

companies reach governance maturity, the supporting description acknowledges that some,

very large, organisations prefer to remain a private company (Clark, 2007:7). Filatotchev et

al’s (2006) empirical research for both Quadrant 2 and Quadrant 3 (Figure 4) is focused on

listed companies, for example, their sample population for “Mature” (i.e. Prime) organisations

are those listed within the FTSE200 Index. Conversely, within the organisation studies

literature this is, as previously discussed, not a requirement to be in the Prime phase.

In 2007 the Open Compliance and Ethics Group (OCEG) launched a draft Corporate

Governance Maturity Model for discussion (Ray, 2007). The one page model, in Appendix

6.1, identified that there were five core elements that “enable and sustain excellence in

governance” (Ray, 2007:28) which they define as; capability, structure, process, information

and technology and results. According to the OCEG’s initial model, these can be measured

on a scale from “forming” to “mature”. It is worth noting that, since launching their

consultation process on the maturity model they have put the concept aside in favour of

focusing on “Principled Performance” within governance, risk and compliance (OCEG,

2009:viii).

Therefore, the following sections will review the organisational studies lifecycle phases, and

associated crises, through the lens of corporate governance.

3.2 Phase - Birth

Organisational Birth comes about from two main sources; owner/founder entrepreneurial

activities or spin off from an existing institution. Depending on the type of Birth the

agent/principal dichotomy may as yet not exist within the organisation as the principle has

not yet appointed an agent (Fama & Jensen, 1983). This explains, in part, why there is very

little corporate governance research in this area.

As previously identified, this initial stage is characterised by the need for legitimacy for both

the organisation and their product (Quinn & Cameron, 1983). The main strategic aim of this

stage is to gain sufficient resources to survive (Quinn & Cameron, 1983). As such, Huse

(2007:111) identifies that there is a clear case for Resource Dependency Theory to be the

main theoretical lens for assessing organisations early in this phase with a Resource-based

View become more necessary later in the phase.


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This phase is usually dominated by the founder and with little formal organisational

structures (Miller & Friesen, 1984). In the early stages of an organisation, the Board grows

as does the top management team. In Zahra and Hayton (2005) they identify that in years 0-

5 the Board average is 4.1 members and the top management team in 2.19, however, by

year 6-8 this has risen to 4.83 and 6.7 respectively. Additionally, the Board’s functional and

educational diversity increases.

Decision making is characterised by individual or small groups making fast decisions. At this

stage there is virtually no requirement for formalised information sharing mechanisms.

Nevertheless, Castaldi and Wortman (1984) suggest that the Board should be a collegial

with the members acting as consultants to the organisation.

Power is concentrated within an individual or small number of people. Gedajlovic et al

(2004:901) identify that the founder has “largely unchallenged discretion to share (or not to

share) authority”.

3.3 Crisis – Management Structure

As the organisation grows it begins to require a management structure to support it. Daily

and Dalton (1992:26) identify that if the founder “fails to successfully share and delegate

power, the firm is likely to falter”. Yet, as Gedajlovic et al (2004) identify this change may

negatively affect the founder in terms of both the financial and non-financial value they gain

from the organisation.

The evolution from founder managed to professional managed may change the values and

culture of the organisation (Gedajlovic et al, 2004). Previously the founder has been able to

manage the risks as he or she wished, as the organisation moves toward the Growth phase

the organisation’s stewards become more risk averse; that is to say the decisions are no

less bold but the risk appetite is potentially constrained by more conservative management

(Miller & Friesen, 1984).

In order to continue growing as an organisation, distributed leadership is required (Cope et

al, 2011). Cope et al (2011) identify that distributed leadership increases resources, social

capital, sense making and problem solving. Schein (1986 cited in Daily & Dalton, 1992:27)

“noted that the professional [manager] may bring more objectivity to the decision-making

process”.


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The inclusion of Non-executive Directors on to the Board allows the organisation to access

expertise outside of the normal scope of the founder’s expertise (Hampel, 1998 in Mallin,

2010:88). Research undertaken in Australia, identified that, within family owned businesses,

63.6% of businesses have no non-family Board members and only 9.5% had two (Moores &

Mula, 1993, in Farrar, 2005). Nonetheless, as Huse (2007:114) notes, the inclusion of

outside directors may assist the organisation in overcoming this crisis phase.

3.4 Phase - Growth

There are an increasing number of articles written focusing on the Growth stage (e.g. Frantz

& Instefjord, 2009; Wijbenga et al 2007; Zahra et al, 2000). Predominately the research

focuses on organisations that use initial public offerings (IPO) as their source of increased

funding. Whilst it is not always the case, IPO’s of shares are common at this stage of the

lifecycle, however, this is not a pre-curser to this phase. It is important to note that large

blocks of share ownership may remain in the hands of the founder, or the founding family

(Mallin, 2010:89) and that the existence of a majority shareholder may affect the behaviour

of the organisation.

Lynall et al (2003:421) identify this stage as being the most likely for externally focused

Boards to be created as well as establishing “formalised governance structures”. These

structures will be smaller and simpler within the small firms and may, for example, include a

combined chair/CEO (Mallin, 2010:88). Organisations preparing for, or who have undertaken

an, IPO increasingly find that the regulators may influence its governance structures

(Filatotchev & Wright, 2005:14). Additionally with regards to external equity investments the

governance structures may also be influenced, for example venture capitalists may insist on

succession planning at this phase (Mallin, 2010:86).

As part of the changes, the power within the organisational structure transfers from the initial

owners to a more defined board of directors, though the extent of this power transfer

depends upon the Board members themselves. As Zahra and Hayton (2005:49) identify the

founder is less likely to be the CEO than in the earlier phase, though, the founder still retains

significant influence. The Board members will bring resources to the company and provide

mentoring for the organisation’s leadership (Huse, 2007:113). It is worth noting that the

Boards established early in this phase are more likely to be homogenous than in the later

phases (Lynall et al, 2003).


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The management’s focus moves from operational issues to strategic issues (Daft, 2004).

Organisations focus more on customer service and entrepreneurial activities. The types of

strategies agreed may vary by funding sources, for example, a venture capitalist, which

maybe looking for a fast return on investment may have a short-term view of their

investment; as such they may influence the strategic direction of the organisation (Nordberg,

2010:420).

Information management structures have to be put in place at this point within the lifecycle to

ensure the effectiveness, and accuracy, of knowledge management. Conversely,

organisations at this stage often still rely on informal mechanisms to interact with institutional

investors (Brandes et al, 2008).

3.5 Crisis – Delegation of Authority

This crisis is based on the need for delegation of authority from the leadership to the lower

levels of the organisational hierarchy (Daft, 2004:327). In order to progress to the next phase

“organizations needs to find mechanisms to control and coordinate departments without

direct supervision from the top” (Daft, 2004:327). Very little research has been undertaken in

relation to corporate governance and this delegation. Child and Rodrigues (2003) note that a

key assumption in corporate governance literature is that Boards are able to control the

organisation sufficiently so as to control the senior managers and below.

Within this crisis the Board’s focus evolves towards the monitoring and control aspects of

managing the organisation (Filatotchev et al, 2006). Filatotchev et al (2006) also note that

the value protecting role of the Board is particularly important as the organisation changes.

Decision making is increasingly devolved at this stage to lower levels of the organisation, as

such, the corporate culture increasingly becomes a focus for the Board. The balance

between shareholders needs and those of the employees must be managed to ensure trust

is maintained on both sides of the relationship (Child and Rodrigues, 2003). Transparency

and communication processes, both formal and informal, are required to enable the

organisation to effectively navigate this crisis (Teerooven & Aamina, 2008).

Adizes (1979:14) sums up this crisis as:

“Up to maturity [Prime]…everything is permitted unless specifically

forbidden. From maturity [Prime] on… everything is forbidden unless

specifically permitted”


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3.6 Phase - Prime

In contrast to the preceding crisis, the Prime stage of the lifecycle is the most heavily

researched within the corporate governance field (Filatotchev et al, 2006). Quinn and

Cameron (1983:50) concur and note that “it may be that organizations must go through the

first threes stages … before many of our conventional theories are appropriate”.

A significant proportion of organisations reaching this phase are listed organisations with

diffused ownership. The defused owners include institutional owners, e.g. pension funds. In

1965 institutional ownership accounted for less than 20% of listed organisations by 2002 the

figure was 61.3% (Brandes et al, 2008). Corporate shareholders have changed the nature of

the interaction with organisations, instead of the investors being “individuals representing

their own interests and that of society, shareholders are increasingly becoming faceless”

(Turnbill 2010:91). Nordberg (2010:420) identify that different shareholders have different

expectations. Huse (2007:116) classifies the ownerships types into;

• Pressure-resistant institutions who have a long term view but not a close relationship

with the business. They will ask astute questions to management and may vote

differently on strategy e.g. pension funds

• Pressure-indeterminate institutions who have a short term relationship with the

organisation e.g. brokerage houses

• Pressure-sensitive institutions that will build a relationship with the organisation but

sell their shares rather than enter into conflict, e.g. banks.

Each of these types of investors causes the Board to act differently (Huse, 2007:116). The

balance of investors will affect the processes within the Board. Brandes et al (2008) note that

the power of these institutional investors has been increasing in the past 20 years, especially

in relation to CEO pay, organisation policies and structure. Nonetheless, the larger

organisational size enables organisations to better manage institutional investor activism due

to increased resources (Brandes at al, 2008).

At this phase in the lifecycle, organisations are, in many cases, subject to corporate

governance codes that define, or in some cases legally prescribe, the corporate governance

structures within the organisation. It is sometimes complex, from within the literature, to

separate the concept of mature corporate governance from that of corporate governance

which is compliant to the applicable regulations in which the researched organisations sit

within. That is to say, do the studied organisations have mature corporate governance or are

they simply compliant with their regulatory environment? Very few studies have been

undertaken looking at corporate governance where the sample population it either wholly, or


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significantly, focused on companies that are privately owned, thus the lack of contrasting

evidence.

Filatotchev et al (2006:267) identify that, as organisations enter this phase, “the strategic role

diminishes, and the emphasis shifts away from resources and towards monitoring”.

Additionally, Boards are not directly involved in the formulation of strategy but “with setting

the strategic context” (Stiles, 2001:634). That is to say, the strategy is predominately

developed within the management side of the relationship with the Board acting as the

gatekeeper (Styles, 2001). Pugliese et al (2009:293) identify three key reasons for the

Board’s limited contribution to strategy; “their distance from day to day operations, the

presence of information asymmetries, and the need to remain independent”. Stiles (2001)

identifies that Boards are responsible for setting the ethical tone of the strategy and

determining the vision of an organisation as well as setting the strategic parameters of the

organisation. He goes on to identify that these parameters can either constrain or facilitate

entrepreneurial activity. Organisations in this phase are, by nature, conservative and not

prone to significant innovations (Miller & Friesen, 1984).

Decision making becomes formalised, as does the supporting information systems. The

emphasis is on formal controls such as cost controls, performance measurement and

budgets (Miller & Friesen, 1984). The complexity and size of large organisations may

constrain the impact a CEO has on the organisation (Daily & Dalton, 1992). Pearce and

Zahra (1991) identified that, within Fortune 500 companies, Boards that had more or equal

power to the CEO, make faster yet more careful decisions and are described by the CEO as

efficient and better informed.

3.7 Crisis – Red Tape

The post-Prime phases are rarely included within the organisation studies literature, Quinn

and Cameron (1983:40) postulates that this may be because the lifecycle analogue fails and

that “changes occur metamorphically and unpredictably”.

With regards to corporate governance in relation to this phase, there is also little, if any

research undertaken with which to illustrate the issues. The majority of red tape research

has been undertaken with public sector data. The changes during this crisis are internally

focused within the organisation. Structural aspects within the organisation, such as

information management systems, are reviewed for their relevance.


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When the “red tape” becomes counter productive to the organisation, managers begin to find

routes around the processes in order to achieve the required outcomes (Daft, 2004:327).

Organisations need to ensure that the administrative processes focus on product efficiency

and not on administrative self interest (Walsh & Dewar, 1987). Additionally, changes in the

competitive environment may expedite the change process to enable the organisation to

remain competitive. As such, there is a requirement to streamline the “red-tape” of the

bureaucracy (Daft, 2004:327) to increase the organisation’s efficiency.

Greiner (1998:57) labels the exit stage from this crisis as the “Elaboration stage” in which

“social control and self-discipline reduce the need for additional formal controls” (Daft,

2004:327). Exit from this crisis has three main routes in terms of the lifecycle phases; return

to Prime with an improved bureaucratic structure, Revival or Decline (Miller & Friesen,

1984).

3.8 Phase - Revival

Daft (2004:328) classify this phase a crisis, contrary to Miller and Friesen (1984) who list it

as another phase. The aim of this phase is to revert to either the Growth or Prime stages to

facilitate the longevity of the organisation and halt the decline in sales. In many cases the

changes within the organisation’s environment force it to enter the Revival stage. Daft

(2004:328) claims that “all mature [Prime] organizations have to go through periods of

revitalisation or they will decline”.

The aim of this phase is to ensure the organisation remains competitive within its

environment, as such, the organisation introduces new produces and enters new markets

(Miller & Friesen, 1984; Quinn & Cameron, 1983). Organisations in this stage often adopt a

more divisional based structure to supports the increased diversification strategy (Miller &

Friesen, 1984). It is worth noting that, the increase in organisational diversification reduces

the pressure for Board involvement in strategic formulation (Judge & Zeithaml, 1992).

Investors form an important part of the restructuring process both in terms of gaining buy-in

for the changes and keeping them informed (Pye & Colville, 2005:226). Alternatively, publicly

listed organisations may undertake a privatisation process.

Daily and Dalton (1997) postulates that separate CEO/Chair roles may either have

prevented decline or enabled the revival of organisations in decline. Additionally, CEO’s who

gain a wider range of opinions from contacts who are dissimilar to themselves have a


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positive effect on firm performance (McDonald et al, 2008). Boards with women on are more

likely to hold CEO’s accountable to poor stock price performance (Ferreira, 2010:235).

Additionally, Boards with women and/or ethnic diversity are likely to see a positive

relationship with return on assets (Carter et al, 2010). Organisation’s surviving within a

declining industry is likely to have larger Boards and the members of the Boards are likely to

hold more directorships (Filatotchev & Toms, 2003).

3.9 Phase - Decline

Drazin and Kazanjian’s (1990) review of Miller and Friesen’s findings identify that

organisations can enter this phase from any of the previous lifecycle phases and can exit

this stage by returning to one of the earlier phase or ceasing trading. As such, any of the

preceding crises can cause an organisation to enter this phase.

As previously identified, the Decline phase is reached when the market for the products

decline, there is a lack of innovation and the profits decline (Miller & Friesen, 1984). This is

exacerbated by the organisation developing a blame culture, causing a lack of focus on the

external environment and a demoralised workforce (Adizes, 1979).

Daily and Dalton (1994) research identified that bankrupt organisations are more likely to

have CEO/Chair duality, until the final year of decline. Therefore, within a failing organisation

the decision making is more likely to be concentrated (Miller & Friesen, 1984). CEO’s who

fail to gain a wider range of opinions from contacts who are dissimilar to themselves have a

negative effect on firm performance (McDonald et al, 2008). Boards at this phase are often

in crisis management.

The focus on monitoring also declines conversely the focus on strategy increases

(Filatotchev et al, 2006). On the other hand, Miller and Friesen (1984) identify that often no

specific strategy is followed during this phase.

4 Summary

The literature reviewed in this paper identifies that there is significant breadth within both the

lifecycle literature and the corporate governance literature. There are, nonetheless, common

themes that can be identified though each of the lifecycle phases that link with key corporate

governance debates. In the following table, Figure 5, the author has summarised the key

findings from the literature review. The table identifies the eleven key aspects that either

form part of the current corporate governance regulatory environment or have a strong


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impact on the organisation in relation to enabling them to support the regulations. These

have been cross referenced with the organisational lifecycle phases and the observed states

within each phase identified. This table then provides an illustration of how corporate

governance can be expected, and is sometimes required, to vary in order to optimise the

organisations performance at each phase of the lifecycle.

Topic Birth Growth Prime Revival Decline Leadership Founder CEO Top

Management Top and Division Management

Ambiguous

CEO/Chair

Either Either Regulatory Driven

Separate Joint

Board Founder Dominated

Development of Formalise Board

Established Established Factions

Board Diversity

Founder Homogenous Regulatory Driven

Diverse Homogenous or Regulatory driven

Power Individual Founder or Small Group

Board Delegated Downwards

Top Management Team

Delegated Upwards

Strategic Focus

Resources Customer Service and Entrepreneurial Activities

Follow Competition

Diversification, Innovation

Stagnate, Crisis Management

Strategy Inputs

Founder Board Developed

Board Ratified Board Input Board Controlled

Decision Making

Informal, Fast

Formal and Informal, Medium Speed

Formal, Slow Formal, Medium Speed

Fractured, Slow

Information Sources

Minimal Informal Formal Increasingly Diverse

Narrow

Risk M gt. Founder Derived

Bold Conservative Considered Extremely Conservative

Org. Structure

Undefined Delegated Authority

Bureaucratic (Positive)

Decentralised Bureaucratic (Negative)

Figure 5 – Summary of the Literature

From this analysis it is clear that there are differences within organisations at each lifecycle

phase in relation to some aspects key of corporate governance. Whilst other corporate

governance aspects can be included in the table, they are, in general, symptomatic issues

from the eleven causal issues in the table.

4.1 Conclusions

The aim of this paper was to identify key markers of corporate governance through reviewing

the relevant literature and using the organisational lifecycle as a structure for discussion. The

table in Figure 5 lists those key markers which can now be used for further analysis to create

a clear, applicable, definition of corporate governance maturity per phase. Within the table


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the observations at each phase need to be confirmed through empirical testing. These tests

will then determine the validity and reliability of the literature review. Once this has been

undertaken, a definition of corporate governance maturity can be determined for each of the

lifecycle phases.

These markers potentially have a future application in areas such as regulation

development. Additionally, it may assist with the evaluation of an organisation’s explanation

of non-compliance within a “comply or explain” regulatory environment. Also, they will enable

potential investors to understand the style of corporate governance they ought to expect

within an organisation in relation to its lifecycle phase. Finally, the results will enable

organisations to identify the changes they need to undertake to progress from one lifecycle

phase to the next, if they so wish.

4.2 Limitations

The situation within which the organisation is located has two major features that impact the

corporate governance maturity directly: the industry and the ownership model. Industries

have their own individual lifecycles and time frames, an organisation of five years old within

a manufacturing industry may be considered in the Birth phase whereas, within the IT

industry they may even be as far developed as Prime. With regards to ownership models,

organisations that have chosen to IPO will be subjected to corporate governance regulations

that a still private organisation is not. This may require the former organisation to adjust its

corporate governance processes earlier than a private company, or in some cases make

changes where the private company would not. These two situational aspects may limit the

findings outlined above.

Walsh and Dewar (1987), in their review of literature on organisation formalisation, warn that

making generalisations across organisational types (e.g. non-profits, competitive

organisations) also need to be controlled for lifecycle phase. It is worth noting that there is

limited literature on the organisational lifecycle in relation to non-profit making organisations

as the majority has been focused on for-profit organisations.

An additional aspect for consideration is the previous stage from which the current stage

was entered from. For example Prime organisation that has just undergone a Revival phase

may appear and act differently from one which came from a Growth phase.


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Finally, it is worth noting that a significant limitation of this literature review is the literature

sample. The literature reviewed represents a mixture of “academic judgment”, “good

practise” and “observed practise” focused papers.


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6 Appendices

6.1 OCEG Capability Maturity Model Draft (Ray, 2007 )


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6.2 Miller & Friesen’s 54 Variables (1984:1178) Strategies What were the strategies used by the firm during the period? A score of 0 means that no such strategy was mentioned in the account. A score of 1 indicates that the strategy was rarely pursued, while a score of 7 indicates that it was a very common competitive weapon. V1 Major & frequent product/service innovations 0 1 2 3 4 5 6 7 V2 Small, incremental product/service modifications 0 1 2 3 4 5 6 7 V3 Follow the lead of competitors 0 1 2 3 4 5 6 7 Diversification into unrelated lines: V4 by acquisition 0 1 2 3 4 5 6 7 V5 establish own dept's or subsidiaries 0 1 2 3 4 5 6 7 V6 Geographical expansion 0 1 2 3 4 5 6 7 V7 Vertical integration: up (e.g., buy raw material sources) 0 1 2 3 4 5 6 7 V8 down (e.g., buy retail outlets 0 1 2 3 4 5 6 7 V9 Extensive advertising 0 1 2 3 4 5 6 7 V10 Dominance of distribution channels 0 1 2 3 4 5 6 7 V11 Shotgun approach to new product introduction (To reduce risks) 0 1 2 3 4 5 6 7 V12 Selective approach to new product introduction 0 1 2 3 4 5 6 7 V13 Use of middlemen in marketing; specify: ___________________ 0 1 2 3 4 5 6 7 V14 Market segmentation – diff. lines for diff. mkts 0 1 2 3 4 5 6 7 V15 Niche strategy – fall between compet’n 0 1 2 3 4 5 6 7 V16 Collusion via trade association, etc. 0 1 2 3 4 5 6 7 V17 Lobbying with government 0 1 2 3 4 5 6 7 V18 Price cutting 0 1 2 3 4 5 6 7 V19 Prestige pricing 0 1 2 3 4 5 6 7 Situation V20 Age of Firm: (1 to 5 years = 1)(6 to 10 = 2)(11 to 30 = 3)

(31 to 200 = 4) V21 Number of Employees: (1 to 100 = 1)(101 to 500 = 2)(501 to 2000 = 3)

Much About Much Smaller Same Larger

1 2 3 4 5 6 7 (2001 to 10,000 =4)( >10,001 = 5)

V22 Size Relative to Competitors V23 The ownership is Widely 1 2 3 4 5 6 7 Controlled by

dispersed Controlled one major by a few stockholder stockholders

V24 How much impact does the board of directors (or owners) have on the Decisions and operations of the firm

Very little 1 2 3 4 5 6 7 Very much impact impact

V25 Owners / shareholders

Very little 1 2 3 4 5 6 7 Very much influence influence

V26 Customers

Very little 1 2 3 4 5 6 7 Very much influence influence

V27 Dynamism in the environment is manifested by the amount and unpredictability of change in customer tastes, production or service technologies, and the modes of competition in the firm's principal industries.

Much less than for Much greater than other periods in sample 1 2 3 4 5 6 7 for other periods

Same

V28 Hostility in the environment is evidenced by price, product, technological, and distribution competition, severe regulatory restrictions, shortages of labor or raw materials, and unfavorable demographic trends (e.g. the drying up of markets). (Same scale as V27)


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V29 Heterogeneity in the environment concerns the differences in competitive tactics, customer tastes, product lines, channels of distribution, etc. across the firm's respective markets. These differences are only significant to the extent that they require very different marketing, production, and administrative practices. (Same scale as V27).

Structure and Decision -Making Style V30 Participative Management is that in which managers get together with their

subordinates to make decisions. Subordinates must actively take part in setting objectives and deciding issues so that they have a real influence upon outcomes. The extent to which participative management is used is: Much less than for Much greater

other periods in 1 2 3 4 5 6 7 than for other periods sample Same as others This scale is used for V34 to V54 inclusive.

V31 Sophisticated Management Information Systems are automated or computerised systems for information dissemination and retrieval.

V32 Performance Controls are accounting systems which monitor the financial performance of sub-units, departments, products or divisions of the organisation.

V33 Action Planning includes formal strategic and project planning and review procedures, the use of capital budgeting techniques, and market forecasting.

V34 Scanning involves the search for problems and opportunities in the external environment of the firm. Finns are to be scored in terms of the amount of tracking performed of consumer tastes, competition, technological and administrative developments, etc. Scanning may be done by staff departments, executives, the sales force, etc. The greater the number of factors tracked and the more widespread the participation in scanning activity, the higher the rating (score).

V35 Controls monitor the internal trends and incidents relevant to organizational performance. MIS, employee performance appraisals, quality controls, cost and profit centers, budgeting, and cost accounting are types of control devices. Score high if there is much emphasis on such controls.

V36 Internal Communication System concerns the openness and fidelity of the information channels in the organization. A high score is given when information reaches decision makers quickly, when it is relevant and undistorted, and when communication flows readily in top-down, bottom-up, and lateral directions.

V37 Centralization of Strategy Making Power involves the distribution of power for making strategic decisions regarding acquisitions, diversification, major new product introductions, long term goals, etc. Centralization is high if the top executives alone make most of the decisions with a minimum of consultation, low, if middle managers determine strategies by the default or intent of top executives (general manager and up).

V38 Delegation of Operating Authority concerns the amount of authority transferred to lower and middle levels of management (any parties below V.P.) for administration of the day-to-day operation of the business. Operating decisions involve equipment replacement, production planning, adjusting prices of goods, inventory purchases, hiring of lower level personnel, etc.

V39 Technocratization The number of highly trained staff specialists and professionally qualified people (accountants, engineers, scientists, doctors) as a percentage of the number of employees.

V40 Resource Availability concerns the state of the firm's material and human resources. Evidence of resource shortages are. labor scarcity, poor raw material supply, inadequate sources of capital, poor production facilities, etc. If resources are abundant, score this scale high.

V41 Organizational Differentiation measures the degree of difference among organizational divisions in terms of their overall goals, marketing and production methods, and decision-making styles. The more disparate the divisions, the higher the score. Even functionally organized firms with only one division may have high levels of differentiation if there exist many different styles of marketing and production, etc. within respective departments due to the nature of products and markets.

V42 Proactiveness of Decisions Does the firm react to trends in the environment or does it shape the environment by introducing new products, technologies, administrative techniques, etc.? A reactive firm (low proactiveness)


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follows the leader while a proactive firm is the first to act. V43 Risk Taking Is there evidence that top managers are risk averse (score

Low) or does the firm frequently make large and risky resource commitments— i.e., those which have a sizeable chance of costly failure?

V44 Product-Market Innovation Does the firm seem particularly innovative in terms of the number and novelty of new products and services which are introduced, and die new markets which are entered?

V45 Analysis of Major Decisions Do decision makers devote much reflective Thought and deliberation to a problem and the array of proposed responses? The time spent on inter-relating symptoms to get at the root cause of problems and the effort spent to generate solutions (good or bad) are examples of the analytical process. A low score would be given what there is a very rapid intuitive response to an issue (this response could be ideal or the worst possible). Evidence of analysis comprises time delays, frequent meetings and discussions, the use of staff specialists, the writing of lengthy reports etc.

V46 Multiplexity of Decisions Do top managers address a broad range of factors in making strategic decisions, or merely a narrow set of factors (low score)? For example, in deciding whether to acquire a company, a multiplex strategist would consider marketing, financial, production, demographic, administrative and other complementarities and problems, whereas low multiplexity would be evidenced by a focus, say, on marketing factors alone,

V47 Integration of Decisions Are actions in one area of the firm complementary or supportive of those in other areas (i.e., divisions, functions) or are they conflicting and mutually inhibiting? High integration would result in (or from) a concerted and well coordinated strategy, while low integration might be manifested by fragmented or clashing tactics (e.g., acquiring new companies when there is inadequate ability to finance or run them, selling products which compete against each other).

V48 Futurity of Decisions concerns how far ahead the firm looks into the future in planning its strategies and operations, A relatively long time horizon (5 years) warrants a high score, A focus on crisis decision making and staving off disasters, warrants a low score,

V49 Consciousness of Strategies concerns the degree of top managers' conscious commitment to an explicit corporate strategy (i.e., a set of objectives coupled with a number of stated favored means for attaining these), A low score is evidenced by unclear goals and the firm's muddling through rather haphazardly.

V50 Management Tenure measures the length of time the most important (top) strategist or executive of the firm has been at the helm.

V51 Adaptiveness of Decisions concerns the responsiveness and appropriateness of decisions to external environmental conditions. For example, an adaptive pricing decision would take into account competitive strategies, customer buying habits, government regulations, etc. Unadaptive decisions (score low) would consistently neglect an important set of external factors.

V52 Industry Expertise of Top Managers Are top managers (VP and up) very familiar with their products and markets? That is, are they in a position to make the most routine decisions because of their excellent knowledge of internal operations and the outside environment, or are managers removed from the field of action and cognizant only of the very gross aspects of the big picture (score low)?

V53 Traditions Does the firm often re-think its strategies (i.e., objectives and means for their attainment) or are these tied largely to precedent (high score)?

V54 Success is measured in terms of average annual growth in profits and sales (normalized, converted to 7-point scales and then averaged). For the older firms, it was sometimes impossible to obtain this information for the early years. In this case a rough estimate was made by the raters to score the 7-point scales. In all cases, estimates were made to be relative to the other periods in the sample. Had we avoided this rather crude method of approximation, our Birth and growth phases would have had their sample sizes reduced by about 50% and 35% respectively.

key identifiers of corporate governance maturity: a ... · adizes (1979) defines a prime...

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