Organizational discretion, board control, and shareholder wealth: A contingency perspective

• Author: Yuliya Ponomareva,Wei Shen,Timurs Umans
• DOI: http://doi.org/10.1111/corg.12274
• Published date: 01 July 2019
• Date: 01 July 2019

ORIGINAL ARTICLE

Organizational discretion, board control, and shareholder

wealth: A contingency perspective

Yuliya Ponomareva

1,2

|Wei Shen

3

|Timurs Umans

4,5

1

ESADE Business School, Ramon Llull

University, Barcelona, Spain

2

Academic Dean's Office, SKOLKOVO School

of Management, Moscow, Russia

3

Department of Management, W. P. Carey

School of Business, Arizona State University,

Tempe, AZ

4

Faculty of Business, Kristianstad University,

Kristianstad, Sweden

5

School of Business and Economics, Linnaeus

University, Växjö, Sweden

Correspondence

Yuliya Ponomareva, ESADE Business School,

Ramon Llull University, Av. de la Torre Blanca,

59, Barcelona E‐08172, Spain.

Email: yuliya.ponomareva@esade.edu

Abstract

Research Question/Issue: How does organizational context influence the impact

of board control over managerial decisions on shareholder wealth?

Research Findings/Insights: We introduce a new theoretical concept—organiza-

tional discretion—to characterize the upper limit of managers' latitude of actions pre-

sented by their organizational context and propose that it moderates the impact of

board control on shareholder wealth. Specifically, we first argue that strategic control

by boards over managerial decisions reduces managers' latitude of actions and leads

to trade‐offs between the containment of managerial opportunism and the pursuit of

strategic opportunities, which consequently influence the relationship between stra-

tegic control and shareholder wealth. We then suggest that the trade‐offs incurred

by strategic control over managerial decisions are more prominent in firms with high

organizational discretion. Because of the trade‐offs, we propose that boards are likely

to decide whether to rely more on strategic control or financial control in internal cor-

porate governance based on their firms' level of organizational discretion.

Theoretical/Academic Implications: By introducing the concept of organizational

discretion and highlighting the trade‐offs caused by boards' strategic control over

managerial decisions, we advance a contingency perspective to enhance the under-

standing about the impact of board control on shareholder wealth. It also bridges

the strategic management and corporate governance research on managerial discre-

tion that has largely evolved separately in the literature.

Practitioner/Policy Implications: Boards should attend to the trade‐offs between

the containment of managerial opportunism and the pursuit of strategic opportunities

when exercising strategic control over managerial decisions. Moreover, considering

the trade‐offs involved, boards should carefully design and implement internal corpo-

rate governance mechanisms based on their firms' level of organizational discretion.

KEYWORDS

Corporate governance, board of directors, firmperformance, managerial discretion, organizational

discretion

DOI: 10.1111/corg.12274

248 © 2019 John Wiley & Sons Ltd Corp Govern Int Rev. 2019;27:248–260.wileyonlinelibrary.com/journal/corg