The impact of corporate governance: A manager's perspective

Introduction Recent corporate scandals have drawn a great deal of attention to the significant agency conflicts between managers and other stakeholders. When management is separated from risk-bearing, managerial incentives are aligned through appropriately designed compensation schemes, governance mechanism and organizational structure. As the role of manager is pivotal in organizational performance, it is imperative to understand how organizational performance is impacted from managerial perspective. For this purpose, the study aims to investigate the effect of institutional arrangements on managerial incentives and their impact over relevant economic outcomes. The major goals of this study will be to understand how different governance schemes (compensation contracts, financial structure, board of director, external governance mechanisms, etc.) are structured to resolve agency conflicts and achieve social efficiency. Agency theory suggests that the separation of corporate ownership and control potentially contributes to managers’ self-serving behavior (Jensen & Meckling, 1976). This perspective assumes that agents and principles have different goals which motivate them to pursue their interests. Therefore, managers may act in ways that benefit management at the expense of the owners (Eisenhardt, 1989). Principals try to motivate agents using several mechanisms such as managerial compensation arrangements and direct monitoring by the owners and the board of directors. An agency problem could arise when a principal is unable to adequately monitor the agent’s behavior. Agency problems may also occur when there is a conflict between the goals of the principal and agent, when the task or decision is risky or when the task is complex (Eisenhardt, 1989).

Research objectives The main objective of this study is to analyze and investigate the role and impact of managers in corporate governance. For this purpose, the researcher will explore agency theory and resource dependency theory in order to analyze the impact of managers on corporate governance. Agency theory has become a major framework used to examine the relationship between owners and managers in the strategic management literature. According to Jensen & Meckling (1976) an agency relationship is defined as “a contract under which one or more persons engage another person or persons to perform some service on their behalf that involves delegating some decision making authority to the agent” (p. 308).

Review of the Literature Agency theory and corporate governance Agency theory dominates the vast majority of research conducted in corporate governance (e.g., Daily et al., 2003; Shleifer & Vishny, 1997). This perspective suggests that the separation of corporate ownership and control potentially contribute to managers’ self-serving behavior (Jensen& Mechling, 1976). Thus, monitoring mechanisms are needed to control managers’ self-interested behavior (Fama & Jensen, 1983; Jensen & Mecklinng, 1976). Agency theory states that certain types of directors are more vigilant in monitoring and controlling management. One of the critical determinants of a board’s governing effectiveness is director independence. Effective boards will be largely composed of independent, outside directors. Because an independent board is widely believed to do a better job in monitoring and controlling management, board independent is assumed to help corporate performance (Baysinger and Butler, 1985; Booth & Deli, 1996; Dalton et al., 1998; Mallette & Fowler, 1992). However, in their meta-analysis, Dalton et al. (1998) found that the relationship between board independence and corporate financial performance is near zero. Agency theory recognizes that effectiveness of board monitoring will be affected by directors’ personal stakes in the performance of the firm on whose boards they sit (Shleifer & Vishny, 1986). The mere presence of outside directors on the board does not ensure that the board will actively monitor management and reduce agency costs. Since ownership increases the financial stakes of directors in the companies on whose boards they sit, the interests of directors with significant holdings will be more closely aligned with those of shareholders; thereby increasing active oversight of management (Hambrick & Jackson, 2000; Jensen, 1993). This alignment will encourage directors to act in ways that will increase the value of the firm and consequently, the value of their own holdings. A meta-analysis by Dalton et al. (2003) found equivocal evidence of a meaningful relationship between board ownership (separate and apart from block holder ownership) and performance. Agency theory also suggests that firm performance is positively related to the presence of large shareholders, i.e., blockholders (Shleifer & Vishny, 1997). These equity holders are individuals or groups holding 5% or more of a given firm’s equity. Agency theory suggests that large-block shareholders have both the incentive and influence to activity monitor firm management in order to maximize their own investment (Bethel & Liebeskind, 1993).

Resource Dependency Theory Resource dependency theory emphasizes the impacts of the environment and other external forces on how organizations manage to survive in the marketplace (Pfeffer & Salancik, 1978). Because organizations rely on the external environment that control critical resources for them, the environment can exercise control over the firms operating in the environment. This dependence on the external environment creates uncertainty for firms. In order to survive, organizations must manage effectively with uncertainty (Pfeffer & Salancik, 1978); Thompson, 1967). Effective dealing with uncertainty leads to power and, eventually, improves survival likelihood (Pfeffer & Salancik, 1978). Pfeffer and Salancik (1978) argued that certain firms are more susceptible to pressure from their environment than others. The firm’s power, with respect to its environment, largely affects the degree to which the social environment can exercise control over the firm. The les powerful the organization will be less likely to resist social pressure or control. Hence, less powerful organizations will be more likely to comply with external pressure. For powerful organizations, their relative strength permits them to defy external pressure since it may be more difficult for society to invalidate their legitimacy than that of less powerful organizations. The size of an organization and the importance of the resources it controls are identified as key determinants of organizational power. Pfeffer and Salancik (1978) noted that largeness enhances organizational power relative to a firm’s environment since “large organizations, because they are interdependent with so many other organizations and with so many people, such as employees and investors, are supported by society long after they are able to satisfy demands efficiently” (P. 131). Thus, large firms that control important resources are less vulnerable than other firms to uncertainty from the external environment.

Resource Dependence Theory and Corporate Governance Although much of the research on board involvement is focused on the board’s monitoring role, some researchers have also suggested that boards can extend their monitoring role to the role of provider of advice and counsel on strategic issues (e.g., Baysinger & Butler, 1985; Johnson et al., 1996). Resource dependence theory provides a theoretical foundation for directors’ resource role. Pfeffer and Salancik (197) suggested that within the broader administrative context, the roles of board include the provision of expert advice and counsel and the exercise of oversight and control. Proponents of resource dependence theory address board members’ contributions as boundary spanners who secure resources from the environment (e.g., Dalton, et al., 1999; Hillman, Cannella, & Paetzold, 2000). Specifically, resource dependence theory suggests that companies may appoint outside directors who can provide access to needed resources from the environment (Pfeffer, 1972). In general, outside directors may facilitate firm’s borrowing, information acquisition, and alliance formation. Although Westphal (1999) reported a positive relationship between the advice and counsel provided by outside directors (through their network ties) and financial performance, overall, evidence supporting the link between board’s network ties and performance is “mixed at best” (Mizruchi, 1996, p. 284).

Research Method The purpose of this study is to provide a better understanding of the impact of managers on corporate governance. Specifically, the research intended to provide information on corporate governance and whether a relationship exists between corporate controls positively impacts managers’ self-serving behavior The research strategy undertaken depends on how the problem looks, what questions the problem leads to and what end result is desirable (Merriam, 1994). For this study, the researcher will use the qualitative research method in order to collected necessary data from the participants.

Research Hypothesis Hypothesis 1O: Firm performance is directly impacted by manager’s effective governance
Hypothesis 2O: Corporate control positively impacts managers’ self-serving behavior

Research Design The research population for this study will include managers in ABC organization (for maintaining confidentiality of the participants, the selected organization is given the pseudonym of ABC). The research population will be selected among managers and leaders of the selected organization(s). The qualitative research design will be employed in this study as the researcher intends to conduct interviews with the selected population. According to Creswell (2002), interviews are the best way to ascertain conceptual information from the research population.

References Baysinger, B.D., & Butler, H. (1985). Corporate governance and the board of directors: Performance effects of changes in board composition. Journal of Law, Economics and Organizations, 1, 101-134

Booth, J.R., & Deli, D.N. (1996). Factors affecting the number of outside directorships held by CEOs. Journal of Financial Economics, 40, 841-104

Creswell, J.W. (2002b). Research design: Qualitative, quantitative, and mixed method approaches. Thousand Oaks: Sage Publications. Daily, C.M., Dalton, D.R., & Cannella, A.A. (2003). Corporate governance: Decades of dialogue and data. Academy of Management Review, 28, 371-382

Dalton, D.R., Daily, C.M. Ellstrand, A.E., & Johnson, J.L. (1998). Meta-analytic reviews of board composition, leadership structure, and financial performance. Strategic Management Journal, 19(3), 269-289.

Eisenhardt, K. (1989). Agency theory: An assessment and review. Academy of Management Review, 14, 57-74

Hambrick, D.C., & Jackson, E.M.(2000). Outside directors with a stake: The linchpin in improving governance. California Management Review, 42(4), 108-127

Jensen, M. C., & Meckling, W.H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305-360

Merriam, S.B. (1998). Qualitative research and case study applications in education. San Francisco:Jossey-Bass.

Pfeffer, J., & Salancik, G.R. (1978). The external control of organizations: A resource-dependence perspective. New York: Harper & Row.

Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737-783

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