This article discusses several theories, practices, themes and barriers in order to raise issues that might move corporate governance research forward, while at the same time providing a way to showcase cutting-edge research models and theories.
Corporate governance mechanisms provide shareholders some assurance that managers will strive to achieve outcomes that are in the shareholders’ interests. Shareholders have both internal and external governance mechanisms to help bring the interests of managers in line with their own. Internal: an effectively structured board, compensation contracts that encourage a shareholder orientation, and concentrated ownership holdings ...view middle of the document...
They recognize that there are many situations in which executives conclude that serving shareholders’ interests also serves their own interests, since in order to protect their reputations as expert decision makers, executives and directors are inclined to operate the firm in a manner that maximizes financial performance indicators, including shareholder returns.
Resource dependence theory
Proponents of this theory address board members’ contributions as boundary spanners of the organization and its environment. In this role, outside directors provide access to resources needed by the firm. For example, outside directors who are also executives of financial institutions may assist in securing favourable lines of credit; outside directors who are partners in a law firm provide legal advice. The provision of these resources enhances organizational functioning, firm performance, and survival.
Power theory addresses the potential conflict of interests among executive, directors, and shareholders. For example, researchers often incorporate power theories to help explain the succession process. There are a number of factors that operate to reduce board power or the CEO power. For example, CEOs can exercise influence over the succession process by dismissing viable successor candidates. The timing of director’s appointment to the board might also impact the power relationship between board member and CEOs.
Agency theoretic principles also dominate corporate practice. Shareholder activism is instructive on this count. Corporate governance reforms have included configuring boards largely of independent outside directors; separating the positions of board chair and chief executive officer; imposing age and term limits for directors; providing executive compensation packages that include contingent forms of pay. Shareholder activists are public pensions funds. A variety of organizations have also issued guidelines designed to create independent boards and ensure that boards are composed of individuals able to effectively discharge their duties.
Were independent governance structures clearly of superior benefit to shareholders?
Independent governance structures are both prescribed in agency theory and sought by shareholder activists. Were independent governance structures clearly of superior benefit to share holders? No. Although issues of control over executives and independence of oversight have dominated research and practice, there is insufficient evidence that these approaches have been productive from a shareholder-oriented perspective. Therefore, alternative theories ad models are needed to effectively uncover the promise and potential of corporate governance.
Here we develop three themes within this stream of research that we believe carry such promise.
The role of monitoring is a central element of agency theory and fully consistent with the view that the separation of ownership from control...