Corporate governance, firm performance, and managerial incentives

• DOI: http://doi.org/10.1111/corg.12253
• Date: 01 July 2018
• Author: Praveen Kumar,Alessandro Zattoni
• Published date: 01 July 2018

EDITORIAL

Corporate governance, firm performance, and managerial

incentives

Examining the role of corporate governance (CG), both conceptually

and empirically, in firm performance—broadly defined—is a major

objective of our journal. After all, scholars and policy makers are ulti-

mately interested in the impact of CG; hence, clarifying the relation

of CG and firm performance, in its many dimensions, is central to

our research mission (Kumar & Zattoni, 2013, 2015). In particular,

because of the challenges posed by the separation of ownership and

control, the CG literature has focused on identifying the effects of

CG‐related factors, such as ownership structure (Kumar & Zattoni,

2014, 2015, 2017a, 2017b; Zattoni, 2011) and managerial incentives

(Kumar & Zattoni, 2016; Zattoni, 2007), on firm performance (Kumar

& Sivaramakrishnan, 2008).

Of course, many issues still remain open, especially with respect

to empirical evidence. Is managerial performance driven mostly by

incentives or do managerial attributes, such as talent and experience,

also play a significant role (e.g., Hambrick & Mason, 1984)? What role

do owners' objectives play in firm performance, even when there is a

separation of ownership and control (Kumar & Zattoni, 2017a)? Fur-

thermore, the concept of managerial and firm performance is not just

limited to the standard economic and financial measures, but extends

to more intangible dimensions such as excessive risk‐taking that can

have long‐run adverse consequences for the firm and its stakeholders.

The four papers in this issue make meaningful contributions to the CG

literature in advancing our understanding of these issues.

In the first paper of the issue, García‐Sánchez and García‐Meca

examine the influence of managerial ability or talent on the firm's

investment efficiency. As we mentioned above, from a conceptual

perspective, this is a very important topic in fully understanding

the relative role of CG and incentives versus intrinsic attributes in

managerial performance. However, the literature has been limited

by the development of appropriate empirical test design and data

to reliably measure managerial ability/talent. Furthermore, empirical

identification essentially requires using evidence from different coun-

tries with varied CG norms and practices. The authors use data from

multiple countries and deploy a model to capture the various interac-

tions between CG (internal and external) and managerial ability.

Consistent with the literature, the study uses an estimate of how

efficiently managers use their firm's resources as a measure of

(managerial) ability and finds some compelling results. Managerial

ability is reliably positively related to investment efficiency. Further-

more, and consistent with their conceptual framework, the authors

find that the benefits of ability are amplified for firms located in

countries with superior board effectiveness, investor protection,

and legal enforcement, suggesting complementarities between mana-

gerial ability and internal and external CG factors. Finally, the study

finds that the advantages of firms having more able managers are

reinforced during financial crisis and in environments of greater

informational asymmetry.

In the second paper, Lazzarini and Musacchio revisit the perfor-

mance determinants of state‐owned enterprises (SOEs). While there

is a literature on this issue, an especially interesting aspect of this

study is that the authors develop a unique database of publicly listed

SOEs in 66 countries and multiple sectors. In particular, this allows

them to compare SOE performance with matched private companies.

The results are of substantial interest. First, the authors find that the

SOEs do not generally underperform their matched private firms.

This suggests that the conclusion in the existing literature that SOEs

are, on average, inefficient compared with private companies may be

due to inadequate controls. Second, SOEs tend to underperform

matched peer private firms when they face “shocks”in the form of

emphasis on policies that are driven by the social and political objec-

tives of their (state) owners, for example during recessions. This

study advances the literature both theoretically and empirically.

While the literature has taken a rather narrow view of agency

conflicts in SOEs, this paper shows that state ownership comes with

both costs and benefits (such as providing rents and protection) and,

rather than looking at average differences between SOEs and private

firms, scholars should focus on changes or “shocks”that motivate

governments to intervene and on institutional contexts that restrict

their ability to do so.

In the third paper of the issue, Sun examines whether bank CEO

compensation—in particular, equity incentives—contributed to the

growth in high‐risk financial (mortgage) securities prior to the collapse

of the mortgage market in the financial crisis of 2008. The prior

research has largely used indirect evidence of the link between

CEO compensation and high‐risk behavior, such as stock return

volatility or loan delinquency. In contrast, this study uses unique

information on actual loan origination records and CEO compensation

in an inclusive sample of publicly traded US banks. The main results

of the paper are that compensation–risk sensitivity (or vega)

measured as the change in executive wealth for changes in stock risk

(or stock price volatility) is reliably positively related to origination of

DOI: 10.1111/corg.12253

236 © 2018 John Wiley & Sons Ltd Corp Govern Int Rev. 2018;26:236–237.wileyonlinelibrary.com/journal/corg