Agency theory and corporate governance A study of the effectiveness of board in their monitoring of the CEO

Agency theory and corporate governance A study of the effectiveness of board in their monitoring... Purpose – The effect of corporate governance on firm performance has long been of great interest to financiers, economists, behavioural scientists, legal practitioners and business operators. Yet there is no consensus over what constitutes an effective corporate governance mechanism that induces agents or managers to consistently act in the interest of share value optimisation. The purpose of this study is to develop a model to resolve an on‐going issue in financial economics: how can CEOs be effectively monitored by the board of directors? Design/methodology/approach – A survey of the literature on corporate governance and the relationship between board composition and financial performance leads to the development of the proposed model, which is based on a framework which takes into account the probability of success representing a CEO's ability, and the active monitoring function (which is represented by the numbers of control visits) carried‐out by the directors. Findings – The design of the model is aimed at identifying an optimal level of monitoring, which will maximise share value, to guide internal and independent directors. Research limitations/implications – The model has limitations: it does not address the input of other directors and it focuses solely on the monitoring function, even though boards also play important roles in providing information and advice to management. Originality/value – The finding of this study contributes to the Agency Theory debate, in essence that the board monitoring of CEO will improve the performance of the CEO and avoid possible conflict of interests. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Modelling in Management Emerald Publishing

Agency theory and corporate governance A study of the effectiveness of board in their monitoring of the CEO

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Publisher
Emerald Publishing
Copyright
Copyright © 2007 Emerald Group Publishing Limited. All rights reserved.
ISSN
1746-5664
DOI
10.1108/17465660710733022
Publisher site
See Article on Publisher Site

Abstract

Purpose – The effect of corporate governance on firm performance has long been of great interest to financiers, economists, behavioural scientists, legal practitioners and business operators. Yet there is no consensus over what constitutes an effective corporate governance mechanism that induces agents or managers to consistently act in the interest of share value optimisation. The purpose of this study is to develop a model to resolve an on‐going issue in financial economics: how can CEOs be effectively monitored by the board of directors? Design/methodology/approach – A survey of the literature on corporate governance and the relationship between board composition and financial performance leads to the development of the proposed model, which is based on a framework which takes into account the probability of success representing a CEO's ability, and the active monitoring function (which is represented by the numbers of control visits) carried‐out by the directors. Findings – The design of the model is aimed at identifying an optimal level of monitoring, which will maximise share value, to guide internal and independent directors. Research limitations/implications – The model has limitations: it does not address the input of other directors and it focuses solely on the monitoring function, even though boards also play important roles in providing information and advice to management. Originality/value – The finding of this study contributes to the Agency Theory debate, in essence that the board monitoring of CEO will improve the performance of the CEO and avoid possible conflict of interests.

Journal

Journal of Modelling in ManagementEmerald Publishing

Published: Mar 20, 2007

Keywords: Corporate governance; Mathematical modelling; Optimization techniques; Chief executives

References

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