Figureheads or potentates? CEO power and board oversight in the context of Sarbanes Oxley

Abstract

Research question/issue:We depart from studies that separately explore chief executive officers' (CEOs') and boards' effects on firm performance. Instead, we examine the direct relationship between CEO power and firm performance, and how board monitoring, and most importantly, a change in the regulatory environment alter the relationship. As such, our study jointly examines the role of both internal and external corporate governance mechanisms on the relationship between CEO power and firm performance. Research findings/insights:Our findings indicate that the negative main effect of a powerful CEO on firm performance is reduced by board monitoring and that the Sarbanes Oxley (SOX) legislation amplifies board monitoring and reduces the negative effects of CEO power.Theoretical/academic implications: Our study shows that agency relationships are grounded in social and institutional contexts. More precisely, our results suggest that CEO power is a function of CEO's relationship with the board, as CEO power and board monitoring interactions affect firm performance. Furthermore, they indicate that the CEO-board relationship is constructed within the legal institutional context, as the shock of SOX alters the effects that different combinations of CEO power and board monitoring have on firm performance. Practitioner/policy implications:Our results highlight to investors and directors that corporate boards should be designed in relation to the power of CEOs.In addition, they provide valuable guidance for policy-makers, suggesting that tight regulations may represent effective deterrents for some CEOs' misbehaviors and favor the alignment of interests with those of company owners. https://capture.udel.edu/media/Katalin+Takacs+Haynes+-+Video+Abstract/1_ ihl7pmhf

Corporate governance and institutions—A review and research agenda

“…In particular, these works suggest the existence of a substitutive relationship between national institutions and governance mechanisms by showing that corporate governance plays a more important role when national institutions are less efficient (Bruno & Claessens, 2010; Chen et al, 2009; Durnev & Kim, 2005). This result contrasts with the conclusions of studies that showed a complementary relationship between national institutions and governance mechanisms (e.g., Haynes, Zattoni, Boyd, & Minichilli, 2019; Lel & Miller, 2008) and with some M&O studies showing that national institutions and governance mechanisms have complementary effects on firm outcomes (e.g., Renders & Gaeremynck, 2012).…”

“…In particular, these works suggest the existence of a substitutive relationship between national institutions and governance mechanisms by showing that corporate governance plays a more important role when national institutions are less efficient (Bruno & Claessens, 2010;Durnev & Kim, 2005). This result contrasts with the conclusions of studies that showed a complementary relationship between national institutions and governance mechanisms (e.g., Haynes, Zattoni, Boyd, & Minichilli, 2019;Lel & Miller, 2008) Capron & Guillén, 2009;Schneper & Guillen, 2004;Van Essen, Strike, Carney, & Sapp, 2015). Finally, our study also invites governance scholars to develop an embedded multiple agency model or an actor-centered institutional perspective to understand key stakeholders' influence on national institutions, governance practices and firm outcomes (Aguilera & Jackson, 2003).…”

The Influence of CEO Hubris on Firm Performance in Indonesia: The Moderating Effects of CEO Power and Board Vigilance

“…To gain trust from their boards and shareholders, newly appointed CEOs will be more likely to try to accomplish higher levels of strategic actions, which result in significant changes in their firms, than their longer-tenured counterparts would do (Haynes et al, 2019;McClelland et al, 2012;Sewpersadh, 2019). However, longer-tenured CEOs are more skilled in managerial expertise and have a higher network centrality for obtaining crucial information (El-Khatib, Fogel and Jandik, 2015; Haynes et al, 2017).…”

“…However, longer-tenured CEOs are more skilled in managerial expertise and have a higher network centrality for obtaining crucial information (El-Khatib, Fogel and Jandik, 2015; Haynes et al, 2017). Long-tenured CEOs, with a high level of trust from their boards, will negatively affect their firms' performances since the boards cannot exercise impartial monitoring (Haynes et al, 2019;Sewpersadh, 2019). Therefore it can be argued that a long-tenure CEO has more trust from both the shareholders and the board, which allows the CEO to pursue value-destroying investments that negatively influence the firm's performance.…”

The influence of CEO duality and board size on the market value of spun-off subsidiaries

“…Board size is a prominent aspect of board composition. Although there have been competing arguments regarding the strengths and weaknesses of larger boards, the bulk of evidence indicates that larger board provides help to better shape corporate strategy (Goodstein et al, 1994) and also support effective monitoring (Haynes et al, 2019). Once the board size gets larger, we expect that there is going to be more diverse expertise and resources available to the organization (Goodstein et al, 1994).…”