Ownership, Managerial Entrenchment, and Corporate Performance

• DOI: http://doi.org/10.1111/corg.12053
• Author: Praveen Kumar,Alessandro Zattoni
• Published date: 01 January 2014
• Date: 01 January 2014

Editorial

Ownership, Managerial Entrenchment, and

Corporate Performance

Praveen Kumar and Alessandro Zattoni

More than 80 years after the seminal work of Berle and

Means (1932), the corporate governance (CG) litera-

ture is continuing to advance our understanding of the

various implications of the separation of ownership and

control in public f‌irms. In particular, at the level of the f‌irm,

the literature has examined both theoretically and empiri-

cally the internal and external governance mechanisms that

monitor and moderate managerial inf‌luence and power.

Specif‌ically, there is an extensive literature on internal

mechanisms, such as an effective board of directors (Adams,

Hermalin, & Weisbach, 2010; Pugliese, Bezemer, Zattoni,

Huse, Van den Bosch, & Volberda, 2009; Van den Berghe &

Levrau, 2004), and external mechanisms, such as monitoring

by large shareholders and institutional investors (Gillan &

Starks, 2000; McLaren, 2004).

Of course, these governance mechanisms do not eliminate

the possibility that managers get entrenched because it

becomes costly and diff‌icult for boards and shareholders to

remove them. The literature advances several reasons for

managerial entrenchment.For example, organizational theo-

rists argue that tenure and CEO’s internal power are posi-

tively related (e.g., Finkelstein & Hambrick, 1989), making it

diff‌icult for boards to wrest controlfrom long-serving CEOs.

Furthermore, shareholder actions, such as proxy motions

against management, are costly for individual shareholders

to undertake (Fluck, 1999) and sometimes not even legally

binding. Similarly, takeover threats by external blockholders

are f‌inancially costly, and often not credible threats for man-

agement of large companies (Cyert, Kumar, & Kang, 2002).

In addition, managers may proactively choose actions that

facilitate entrenchment (Shleifer & Vishny, 1989).

Our knowledge of the consequences of such entrench-

ment and the moderating role of ownership structure is still

limited, and thus is a fertile area for research by CG scholars.

There is evidence that entrenchment and weak governance

have negative consequences for operational and f‌inancial

performance (Core, Holthausen, & Larcker, 1999). In addi-

tion, the recent literature has shown that entrenched man-

agers are more likely to choose investment and f‌inancial

policies that are not in the best interests of f‌irms’ various

stakeholders (Hu & Kumar, 2004; Kang, Kumar, & Lee, 2006;

Kumar & Rabinovitch, 2013). However, many important

questions remain unanswered in the literature. In particular,

we need research on the impact of ownership structures and

managerial entrenchment on other important areas of f‌irm

performance, such as innovation and f‌inancial transparency.

This type of research should build on f‌indings, for

example, that ownership types matter for broader areas of

performance, such as corporate social responsibility (Dam &

Scholtens, 2012). More broadly, while entrenchment and its

interaction with ownership structure are typically analyzed

through the lens of agency theory, how can we broaden the

conceptual framework to allow insights from other theoreti-

cal frameworks, such as institutional and resource-based

theories?

In this issue, we include three papers that examine these

issues and generate signif‌icant new results and insights. In

the f‌irst paper, Lodh et al. examine the incentive effects of

family ownership for innovation productivity, an issue that

has thus far received limited attention in the literature on

family ownership. But it is well known that growth oppor-

tunities generated by innovations and development of new

economic opportunities are central to the evolution of

industries and economic growth (Romer, 1990; Schumpeter,

1942). Moreover, family ownership is probably the most

widely prevalent form of business globally. Hence, the f‌ind-

ings of this study are important and timely, especially for

emerging economies. On the one hand, the impact of inno-

vations is especially signif‌icant for the economic growth of

emerging economies. On the other hand, the relatively unde-

veloped institutional structures in such economies constrain

innovation activity. In these countries, familyownership and

aff‌iliation with family-owned business groups can poten-

tially offset the def‌iciencies of the institutional structure

(Zattoni, Pedersen, & Kumar, 2009). From a theoretical per-

spective, the emerging market setting provides an interest-

ing tension between the predictions of agency and

institutional theories regarding innovation. Using data on

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Corporate Governance: An International Review, 2014, 22(1): 1–3

© 2014 John Wiley & Sons Ltd

doi:10.1111/corg.12053