The concept of managerial discretion in corporate governance – better off without it?

Abstract

Purpose This paper aims to assess the concept of managerial discretion with respect to its theoretical and empirical usefulness for corporate governance research. Design/methodology/approach This paper scrutinises applied theoretical claims, definitions and methods, as well as a number of empirical studies on managerial discretion. Findings To date, no empirical definition of the concept has been presented and no measurement has been developed and tested for reliability and validity that contains all three factors of the managerial discretion concept, as proposed by Hambrick and Finkelstein (1987). Practical implications Research on managerial discretion does not provide owners and directors of boards with any advice on granting top managers a high or low degree of discretion. Originality/value This paper concludes that corporate governance scholarship will improve if it abandons the concept of managerial discretion.

Reaffirming the importance of managerial discretion in corporate governance: a comment on Andersen (2017)

“…Although, they focused on new institutional context, some countries from the Arab world, they also extended their theoretical framework and showed that not only cultural values of individualism, uncertainty avoidance and power distance affect managerial discretion but also a range of cultural practices such as future, performance, humane orientations, gender equality, and assertiveness play an important role in shaping the degree of leeway in decision making. Andersen (2017) argued that managerial discretion as defined by Hambrick and Finkelstein (1987) is determined by three factors: the task environment, the internal organisation and managers (executives) own attributes. This is the first misleading conceptualisation when assuming that the environment is only the immediate domain in which firms operate, in other words, the industry.…”

“…Therefore, the free-trade environment does allow for greater variety and change. Andersen (2017) continued to argue that the organisational dimension presented by Hambrick and Finkelstein (1987) incorporates words that form examples of 'anthropomorphism' in writing on organisations. His argument resides in the logic that only humans can allow or be amenable to anything.…”

“…A recent theoretical paper by Andersen (2017), argued that corporate governance research is better off without managerial discretion, based on several arguments. First, Andersen (2017) argues that research in managerial discretion does not provide a clear and direct assessment of the construct and therefore is still ambiguous. Second, antecedents and consequences of managerial discretion are not validated and no empirical evidence exists to support the importance of this construct.…”

“…Third, managerial discretion research was not able to demonstrate whether it is good or bad for organisations or if executives accorded with greater discretion would affect firms' outcomes. In this paper, we attend to the main arguments presented in Andersen (2017) by refuting the conceptualisation and measurement of managerial discretion. This enables us to reaffirm the significant importance of managerial discretion to corporate governance research and provide theoretically and empirically driven arguments from recent literature on managerial discretion to support the crucial role of managerial discretion in affecting firm' outcomes.…”

“…This enables us to reaffirm the significant importance of managerial discretion to corporate governance research and provide theoretically and empirically driven arguments from recent literature on managerial discretion to support the crucial role of managerial discretion in affecting firm' outcomes. We start with a general overview of the concept of managerial discretion and its main dimensions then comment on the main arguments presented in Andersen (2017).…”