Abstract
This research investigates the mechanism underlying the abandonment of practice, specifically the transition of firms’ corporate governance from shareholder to stakeholder orientations. Previous studies often explore the transition from stakeholder to shareholder orientations. This is because shareholder orientation accompanies the movement of globalisation.
The issues accompanying globalisation, such as economic unequal between individuals or organisations have led to the backlash against globalisation. This has enhanced the interest in Sustainable Development of Goals (SDGs) as well as critiques of excessive emphasis on shareholder interests. Instances of firms’ backlash, such as the abolition of the executive officer system, can be observed. Despite these observable facts, few academics have explored the abandonment of practice. To address the gap, we use backlash theory, which is widely used in political economy studies, to explored the abandonment of practice.
We understand the backlash theory from two concepts: 1) disparity of firm performance and 2) attachment to old rules. The disparity of firm performance means that firms are unsuccessful under the new rules of the game, while the attachment to old rules refers to firms rejecting the new rules of the game. We hypothesise both the disparity of firm performance and attachment to old rules to foster firms to backlash against a globally standardised shareholder orientation and accordingly, implement the abandonment of practice.
To test the hypotheses, this study sets Japanese firms listed between 2005 and 2018 as the sample. This is because Japanese firms experienced the adoption of practice following the trend of globalisation in the early 1990s and may currently face the backlash against a globally standardised shareholder orientation.
Before testing, we estimate corporate governance practice, which combines multiple components of corporate governance, to operationalise the dependent variable. This is necessary because multiple forms of corporate governance co-exist in Japan. Additionally, we operationalise the independent variables by measuring firms’ performance, amount of borrowing from banks and inter-firm networks.
Using the dependent and independent variables, we conducted the Heckman two-stage estimation model. The empirical results robustly demonstrate that the disparity of firm performance and attachment to old rules cause firms to implement the abandonment of practice. These findings support our hypotheses and are consistent with the backlash theory.
This work makes several contributions. It academically contributes to corporate governance study by investigating corporate governance transition distinct from those examined in existing study, utilizing a unique theory.