An examination of the relationship of governance mechanisms to performance

The purpose of this paper is to draw together the many different facets of corporate governance that have been examined in the extensive literature in both strategic management and finance. In particular, we are interested in the relationship between the typical agency theory constructs of monitoring, incentives and ownership structure, with financial performance. First, we catalog this large body of work to see where there are still unanswered questions. We find that previous work has generally focused on examining subsets of governance mechanisms, typically studying one or two governance variables in any one study. Our view is that the most critical issue still to examine, is the ability of firms to choose among a number of different governance mechanisms in order to create the appropriate structure for that firm, given the environment in which it operates. We identify a sample of firms and examine CEO compensation, CEO tenure, board composition, leadership structure and ownership structure and their contribution to both market performance. Market Value Added, and risk-adjusted accounting performance, Economic Value Added. In addition, we control for ownership by block-holders, industry performance, and firm size. We examine these measures both individually and as interactions. Our results indicate that while some of the traditional agency variables do impact performance, both individually and as interactions, industry performance is a strong and significant driver of performance for our sample of firms. We conclude that, while there is evidence to support that firms may use governance packages to deal with agency issues, further research could provide important evidence on these issues by focusing on examining a more refined, industry-level context. (C) 2001 Elsevier Science Inc. All rights reserved.