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Substitutes Or Complements? A Configurational Examination Of Corporate Governance Mechanisms

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The Academy of Management Journal

Published online on

Abstract

We examine the nature of the relationships among the bundle of governance mechanisms that have been theorized to effectively control the agency problem. To do so, we performed a qualitative comparative analysis using the fuzzy-set approach to study the combinations of governance mechanisms that yield high firm performance among the S&P 1500 firms. Our configurational approach allowed us to explore the complex interrelationships among the many different governance mechanisms and to elaborate theory on the many ways in which they combine. Our study shows that some type of CEO incentive mechanism and some type of monitoring mechanism are always present among firms that achieve high profitability, thereby suggesting that such mechanisms are complements. Our findings also highlight the simultaneity of substitution and complementarity among and across the various monitoring mechanisms. Finally, our findings suggest that the effectiveness of board independence and CEO non-duality, mechanisms widely held to resolve the agency problem, are a function of how they combine with the other mechanisms in the governance bundle.