Corporate governance research has largely focused on internal governance mechanisms (i.e., the board of directors, controlling owners, and managerial incentives).However, much of this work ignores the role that external corporate governance practices play in preventing managers from engaging in activities detrimental to the welfare of shareholders, and the overall firm. In this essay, we first review and organize current research on external governance mechanisms and integrate this siloed body of work within the broader corporate governance equation. We explicitly focus on six external governance mechanisms: the legal environment, the market for corporate control, external auditors, stakeholder activism, rating organizations and the media. We discuss findings showing how external governance mechanisms act both as independent forces as well as in conjunction with internal corporate governance mechanisms. We conclude the review by mapping an agenda for future research on corporate governance that better integrates internal and external governance mechanisms. Our review suggests that studying different configurations of external and internal governance mechanisms will help us to better understand what factors and conditions lead to effective corporate governance.

We develop a contingency approach to explain how firm ownership influences the monitoring function of the board—measured as the magnitude of external audit fees contracted by the board—by extending agency theory to incorporate the resource dependence notion that boards have distinct incentives and abilities to monitor management. Analyses of data on Continental European companies reveal that while board independence and audit services are complementary when ownership is dispersed, this is not the case when ownership is concentrated—suggesting that ownership concentration and board composition become substitutes in terms of monitoring management. Additional analysis shows that the relationship between board composition and external audit fees is also contingent upon the type of the controlling shareholder. Copyright © 2013 John Wiley & Sons, Ltd.

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Corporate governance research has largely focused on internal governance mechanisms (i.e., the board of directors, controlling owners, and managerial incentives).However, much of this work ignores the role that external corporate governance practices play in preventing managers from engaging in activities detrimental to the welfare of shareholders, and the overall firm. In this essay, we first review and organize current research on external governance mechanisms and integrate this siloed body of work within the broader corporate governance equation. We explicitly focus on six external governance mechanisms: the legal environment, the market for corporate control, external auditors, stakeholder activism, rating organizations and the media. We discuss findings showing how external governance mechanisms act both as independent forces as well as in conjunction with internal corporate governance mechanisms. We conclude the review by mapping an agenda for future research on corporate governance that better integrates internal and external governance mechanisms. Our review suggests that studying different configurations of external and internal governance mechanisms will help us to better understand what factors and conditions lead to effective corporate governance.