Governing Top Managers: Board Control, Social Categorization, and Their Unintended Influence on Discretionary Behaviors

Joshua R. Knapp · Thomas Dalziel · Marianne W. Lewis

36 citations0/0 files storedCorporate Governance An International Review

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Corporate Finance and Governance Gender Diversity and Inequality Corporate Governance and Financial Management

Abstract

Manuscript Type: Conceptual Research Question/Issue: This paper seeks to complement agency and stewardship perspectives regarding the governance of top managers by using insights from social categorization theory. Research Findings/Insights: This paper looks inside the black box of the control-performance relationship. We acknowledge that boards can positively influence organizational functioning by monitoring the top management team. However, we also argue that board control contains a hidden cost. The model we develop describes how control can highlight the distinction between principals and agents thereby causing the top management team to adopt a biased and less cooperative “us vs. them” orientation towards owners and their representatives. We contend this results in an increase in negative discretionary behavior and a decrease in positive discretionary behavior, which dampen the positive influence of control on firm performance. We also describe techniques for mitigating this unintended outcome of control. Theoretical/Academic Implications: Agency and stewardship theories offer alternative views of human nature and provide divergent prescriptions for governance. This paper presents social categorization theory as a complementary lens emphasizing a situational and social view of human nature that helps explain top managers' discretionary behaviors that influence firm performance. Practitioner/Policy Implications: Ongoing governance scandals are costly illustrations of unchecked managerial opportunism. They demonstrate the need for vigilant control. A control approach to governance, however, does not consistently improve firm performance. This paper offers an explanation. It acknowledges that board control is necessary, while arguing that it can have unwanted side effects. We describe two tools (individualization and social recategorization) that can be used to ameliorate these effects.

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References

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